Bush supporters downplayed the vote
The US Senate has defied President George W Bush by voting to convert half of a $20bn aid package to rebuild Iraq into a loan.
The Republican-run chamber voted 51-47 for the proposal to make $10bn a loan - to be converted to a grant if other countries agree to waive debts owed to them from the former regime.
The Bush administration argued against the idea saying loans would worsen Iraq's foreign debt and further Arab suspicious about US intentions in the country.
But Republican senator Lindsey Graham, who backed the loan, said: "It's very hard for me to go home and explain that we have to give $20bn to a country sitting on £1 trillion worth of oil."
Analysts say the vote shows lawmakers' concerns at the vast spending plans on foreign aid at a time of record deficits at home - with elections just over a year away.
There will now be further discussions with the House of Representatives to agree a final measure, which President Bush wants before the donors' conference on 23 October.
Hearts and minds
Vice President Dick Cheney had spent the day calling senators hoping to block the loan plan, said congressional aides.
They wanted the rebuilding assistance to come entirely from grants financed by US taxpayers.
"The battle for the hearts and minds of the Iraqi people is not over by a long shot," said Republican Senator John McCain.
He feared the amendment would "send a clear signal that the United States is really, really there for the oil."
But a number of Republicans downplayed the vote.
Senator Mitch McConnell said it had been a "good day for the president" and the Senate vote would be overshadowed by the UN backing of American plans for Iraq.
However Senator Democrat leader Tom Daschle said the vote sent a "strong bipartisan" message that the administration must do more to ensure US troops and taxpayers "don't have to go on shouldering this costly burden virtually alone".
The $10bn loan could be converted by President Bush to a grant if France, Russia, Saudi Arabia and other creditors forgive at least 90% of Iraq's roughly $130bn debt, say supporters of the idea.