Obama aide quits amid loan flap

WASHINGTON - A former CEO leading Barack Obama's search for a vice presidential candidate resigned yesterday after questions about his home-mortgage deals became a distraction for a candidate who argues he's not influenced by special interests.

Obama accepted Johnson's resignation yesterday, leaving the search at least temporarily in the hands of two other prominent Democratic attorneys who also had been scouting candidates - former Deputy Attorney General Eric Holder and Caroline Kennedy.

"Jim did not want to distract in any way from the very important task of gathering information about my vice presidential nominee, so he has made a decision to step aside that I accept," Obama said.

Johnson, the former chairman of mortgage lender Fannie Mae, came under fire from GOP candidate John McCain and the Republican Party after reports that Johnson got mortgages with help from the CEO of Countrywide Financial Corp.

McCain had accused Obama of hypocrisy for speaking out against Countrywide's role in the subprime mortgage crisis.

Obama's campaign declined to say whether he would replace Johnson, who also led the vice-presidential search for Democratic nominee John Kerry in 2004 and Walter Mondale in 1984.

Bush won't rule out strike on Iran

MESEBERG, Germany - President Bush yesterday raised the possibility of a military strike to thwart Tehran's presumed nuclear weapons ambitions, speaking aggressively even as he admitted having been unwise to have done so previously about Iraq.

Bush's host in two days of meetings at a baroque castle, German Chancellor Angela Merkel, made clear her views on the saber-rattling - however subtle - without directly countering her guest. "I very clearly pin my hopes on diplomatic efforts," Merkel said, reflecting the deeply held European opinion that military action against Iran is nearly unthinkable.

Merkel joined Bush in urging further sanctions against Iran if it fails to suspend its uranium enrichment program.

Iran's leader weighed in, too. Speaking before thousands in the central Iranian city of Shahr-e-Kord, President Mahmoud Ahmadinejad said Bush "won't be able to harm even one centimeter of the sacred land of Iran" and promised continued defiance over Iran's nuclear activities. Iran says it is enriching uranium to generate electricity, not build a bomb - a claim the West doubts is true.

That's a mighty big deficit

WASHINGTON - A flood of economic-aid payments pushed the federal budget deficit to $165.9 billion, the highest imbalance ever for May.

The Treasury Department reported Wednesday that the May deficit was more than double what it was in May 2007. Some $48 billion in payments went out as part of the $168 billion economic relief effort to revive the economy and keep the country from a deep recession.

For the first eight months of the budget year, the deficit totaled $319.4 billion. That is slightly below the record for this period, $346 billion, set in the 2004 budget year.

The Bush administration estimated in February that the deficit for this year would be $410 billion. That would be just under the all-time high of $413 billion in 2004. But many private economists believe this year's deficit will top it, reflecting the economic-stimulus checks and weaker government receipts.

Gas likely to stay above $4

WASHINGTON - If it's a shock to pay $60, or even $100, to fill up your gas tank, get used to it.

Prices around $4 a gallon are likely to be here for quite a while.

The Energy Department said yesterday it expects gasoline prices to peak in August at about $4.15 on average - a dime more than today. That might be encouraging for people who are beginning to think prices will keep climbing forever.

But there won't be much relief. The government estimates that prices at the pump could stay near that level the rest of this year - and next.

* WASHINGTON - The economy remained "generally weak" heading into summer as rising costs for energy and food pounded consumers and forced some companies to push their own prices higher.

The Federal Reserve's new snapshot of business conditions, released yesterday, underscored two big sore spots for the country: listless economic activity coupled with high energy and food prices. Those rising prices carry the risk of both spreading inflation and putting another drag on overall economic growth.

Did U.S. kill Pakistani troops?

ISLAMABAD, Pakistan - Pakistan's army and the U.S. military gave widely differing accounts yesterday of a clash on the Afghan border that left 11 Pakistani troops dead.

While their forces were just a few hundred yards apart, a huge gulf existed in their views of events - underscoring the mutual suspicion between two uneasy allies in the war against international terrorism.

There was no way to independently check on what happened in the fighting Tuesday night on the ill-defined border between Pakistan's

Mohmand tribal agency and Afghanistan's Kunar province.

U.S. officials said three aircraft launched about a dozen bombs against insurgents attacking into Afghanistan from Pakistan.

The Pentagon said it was too early to say whether the airstrike killed the Pakistani troops, as claimed by Pakistan's army.

China eyed in computer-hacking

WASHINGTON - Multiple congressional computers have been hacked by people working from inside China, lawmakers said yesterday, suggesting the Chinese were seeking lists of dissidents.

Two congressmen, both longtime critics of Beijing's record on human rights, said the compromised computers contained information about political dissidents from around the world. One of the lawmakers said he'd been discouraged from disclosing the computer attacks by other U.S. officials.

Rep. Frank Wolf, R-Va., said four of his computers were compromised beginning in 2006. New Jersey Rep. Chris Smith, a senior Republican on the House Foreign Affairs Committee, said two of the computers at his global human rights subcommittee were attacked in December 2006 and March 2007.

Wolf said that following one of the attacks, a car with license plates belonging to Chinese officials went to the home of a dissident in Fairfax County, Va., outside Washington and photographed it. *

- Associated Press