U.S. military official, who spoke on condition of anonymity, said documents were discovered linking Orao and Yugoslavia's main arms company, Yugoimport, with exports of military equipment to Iraq and helping Saddam Hussein's terror network. When NATO soldiers raided the Orao factory, they found a document dated Sept. 25, 2002 telling five staff members to remain in Iraq and remove all traces of the company's involvement there, diplomats in Bosnia-Herzegovina said...

The UN Security Council imposed a strict embargo on Iraq after it invaded neighbouring Kuwait in 1990 and fired Scud missiles at Israel and Saudi Arabia during the 1991 Gulf War.

Under the sanctions regime, all sales to Iraq must be approved by the United Nations and paid for through an escrow account which controls the proceeds from Iraqi oil sales.

The sanctions cannot be lifted until weapons inspectors certify that Iraq is free of weapons of mass destruction. Countries violating the embargo could face punitive UN sanctions.

The military official, who spoke on condition of anonymity, said the deal came to light during a recent NATO inspection of the Orao, Bosnian Serb arms company in Bijeljina, a town in the Serb-controlled part of Bosnia. He said documents were discovered linking Orao and Yugoslavia's main arms company, Yugoimport, with exports of military equipment to Iraq and helping Saddam Hussein's terror network.

The Orao company produces aircraft engine parts, including parts for Russian-built MiG jet fighters, and equipment that can be used in air defense. It also runs a training center for ground crews that maintain military installations.

After searching the offices of Orao, a state-owned company in the semiautonomous Serbian republic within Bosnia (Republika Srpska), NATO peacekeeping troops said on Tuesday that they had found proof of ongoing exports to Baghdad.

The American Embassy in Bosnia accused Orao last month of selling spare parts and services to Iraq for its Soviet-era MIG-21 warplanes, continuing a longstanding trade that began when Bosnia was a republic in a larger, socialist Yugoslavia.

When NATO soldiers raided the Orao factory, they found a document dated Sept. 25 telling five staff members to remain in Iraq and remove all traces of the company's involvement there, diplomats in Bosnia said.

"Given that Saddam has had 10 years of sanctions, how does he keep his old equipment going?" the diplomat asked. "If Orao is sending in spare parts, they would be very useful in keeping his decrepit air force flying."

"The U.S. expects the relevant authorities in Bosnia and Herzegovina, and Yugoslavia, to undertake the necessary steps to immediately halt any ongoing cooperation with Iraq, to conduct a thorough investigation and to hold accountable those responsible," said the State Department spokesman, Richard A. Boucher.

Public allegations have mentioned only the repair of planes, but senior government ministers in Serbia, Yugoslavia's dominant republic, say U.S. officials have presented evidence to them of much broader military collaboration that includes assistance with air defense networks, surface-to-air-missile technology and munitions.

With U.S. warplanes patrolling Iraqi skies and preparations underway for possible war with the country, Iraq's air defenses are of high concern in Washington. Iraq is under a U.N. weapons embargo.

On Oct. 11, NATO peacekeeping troops in Bosnia raided facilities of the Orao company in the town of Bijeljina, located in the Bosnian Serb Republic within Bosnia, which maintains close relations with neighboring Serbia.

Troops remained in the factory for more than 48 hours copying documents and records from computer hard drives. "We have so much," said Yves Vanier, a spokesman for the peacekeeping force in Sarajevo. "It may take five weeks to go through the information."

Those claims were corroborated by an article published by the Serbian daily newspaper Blic. It quotes a document allegedly seized in the Bijeljina factory that instructs Iraqi officials to go to a shipment of equipment stranded in the port of Bar in Montenegro and "remove all instructions in Serbo-Croatian language and to return them to Yugoimport's experts."

British and local media have alleged that Yugoslav radar and weapons systems experts were using their experience from the 1999 NATO air war against Yugoslavia to help Iraq upgrade its air force.

Although outgunned and suffering major losses Yugoslav troops succeeded in protecting several military targets during the 1999 conflict; also they claimed they shot down two U.S. aircraft, including an F-117 Nighthawk stealth attack plane.

A high-ranking Yugoslav military official confirmed the report to The Associated Press and said Yugoimport "acted as an intermediary between Orao and the Iraqi government."

The Belgrade newspapers Blic reported that the documents uncovered by NATO also indicated that if U.N. weapons inspectors returned to Iraq, the Yugoslav experts there could dismantle the equipment within 10 days and the Iraqis would hide it until the inspectors were gone.

Police found explosive materials in 14 containers stored on the ship, Interior Ministry spokeswoman Zinka Bardic said. According to police the powder could be used in mortars, artillery shells and rockets.

Croatian officials have refused to give details about the seizure of the ship, the Boka Star, which is owned by a businessman from Montenegro, Yugoslavia's smaller republic. It was seized Wednesday when it sailed into Croatian waters under Tongan flag.

The seizure of the ship came as the U.S. Embassy in neighboring Bosnia announced it had "clear evidence" that a Bosnian factory, Orao, and the Yugoslav state-owned arms dealer Yugoimport were "refurbishing military aircraft for Iraq," in a violation of the U.N. embargo.

Croatian officials are studying powders found on board a ship bound from Yugoslavia to Iraq to see whether the Iraqis could use them to improve the performance of Scud missiles, Croatian police officials said today.

At least four containers on the ship Boka Star contained the suspicious powders, according to officials at the Adriatic Sea port of Rijeka. The cargo had been described as spare parts for MiG-21 fighter jets, which are Soviet-designed planes dating from the 1950s that are part of the remnants of Iraqi President Saddam Hussein's air force.

The interception of the ship followed a NATO military raid on Oct. 12 on the Orao institute arms factory in the Serb-controlled zone of Bosnia. Documents seized at the plant linked the factory with weapons exports to Iraq.

Although the factory is located in Bosnia, it has links with the Jugoimport, a state-run Yugoslav weapons production firm with several factories in Serbia, the dominant republic of Yugoslavia. The factories produce light and heavy weapons, ammunition and explosives.

The State Department spokesman, Richard Boucher, said there was "clear evidence" that both Orao and Jugoimport were refitting Iraqi military jets. Weapons sales to Iraq are forbidden by a U.N. embargo.

In advance of a possible U.S. invasion of Iraq, sales of military equipment to the country are a red flag for the Bush administration. U.S. reports say that Iraq possesses at least two dozen Scud missiles left over from the Persian Gulf War. 

During the war, Iraqi troops fired 93 Scuds at Israel and Persian Gulf allies of the United States.