CRAWFORD, Texas - President Bush used a "pocket veto" yesterday to reject a sweeping defense bill because of a provision that he said would expose the Iraqi government to expensive lawsuits seeking damages from the Saddam Hussein era.

In a statement, Bush said the legislation "would imperil billions of dollars of Iraqi assets at a crucial juncture in that nation's reconstruction efforts." The provision at issue was sponsored by Sen. Frank Lautenberg (D., N.J.).

The overall legislation sets defense policy for the coming year and approves $696 billion in spending, including $189 billion for the wars in Iraq and Afghanistan. Also mandated in the bill are improved benefits for veterans and tighter oversight of contractors and weapons programs.

The pocket veto means troops will get a 3 percent raise Jan. 1 instead of the 3.5 percent authorized by the bill.

Bush's decision to use a pocket veto, announced while he was vacationing at his Texas ranch, means the legislation will die at midnight Dec. 31. This tactic for killing a bill can be used only when Congress is not in session.

The House last week adjourned until Jan. 15; the Senate returns a week later but has been holding brief, often seconds-long pro forma sessions every two or three days to prevent Bush from making appointments that otherwise would need Senate approval.

Brendan Daly, spokesman for House Speaker Nancy Pelosi (D., Calif.), said: "The House rejects any assertion that the White House has the authority to do a pocket veto."

When adjourning before Christmas, the House instructed its clerk to accept any communications - such as veto messages - from the White House during the monthlong break.

A Democratic congressional aide pointed out that a pocket veto cannot be overridden by Congress and allows Bush to distance himself from the rejection of a major Pentagon bill in a time of war.

In a message to Congress, Bush said he was sending the bill, and his outline of objections, to the House clerk "to avoid unnecessary litigation about the non-enactment of the bill that results from my withholding approval, and to leave no doubt that the bill is being vetoed."

Democratic aides said they had not ruled out any legislative options, including dropping the language on lawsuits against Iraq and sending the rest of the bill back to Bush.

Lautenberg said the provision he sponsored was not aimed specifically at Iraq. He said it would allow "American victims of terror to hold perpetrators accountable - plain and simple."

The New Jersey senator noted that Iran had been targeted in lawsuits, including one seeking damages for the 1983 bombing of U.S. Marine barracks in Beirut that killed 241 servicemen.

Senate Minority Leader Mitch McConnell (R., Ky.) called on lawmakers to "move rapidly to fix this section" when Congress returns in January so the underlying bill can become law.

Democratic congressional leaders called Bush's move a last-minute stunt, saying he had never indicated his intention to veto the bill.

Bush aides said they had signaled concern about the provision for weeks, though no formal veto threat had been issued. They said their concern had grown urgent recently after a legal review and feedback from U.S. diplomats in Iraq and Iraqi leaders.

The disputed section of the bill would reshape Iraq's immunity to lawsuits, exposing its government to litigation in U.S. courts stemming from the treatment of Americans in Iraq during Hussein's rule. Even suits that had once been rejected could be refiled.

Bush's aides warned of a dire scenario - a rush of litigation that could freeze billions of dollars in Iraqi assets now being held in U.S. banks. Money at the heart of the Iraqi rebuilding effort would be tied up in court, potentially halting the very stabilization efforts that could get U.S. troops home faster, the aides said.

The White House said $20 billion to $30 billion in Iraqi assets could be at stake, along with funds held by U.S. companies in joint ventures with the Iraqi government.

Democrats said Bush could have worked out a technical fix sooner if he had wanted, without rejecting an entire bill containing extra help and money for troops.

This article includes information from Bloomberg News.