A leading American contractor has pulled out of a major Iraqi reconstruction project, the latest sign of how the ever-increasing violence in Iraq threatens to overwhelm America's plans to democratize and rebuild the country.

The news emerged less than 24 hours after the devastating explosion at the US military base near Mosul in which 22 people were killed, including 14 soldiers and four contractors, which has sent shock-waves through the United States.

General Richard Myers, chairman of the Joint Chiefs of Staff, said that after investigations into Tuesday's blast in a mess tent at Forward Operating Base Marez, evidence pointed to it being an inside job. "It looks like it was an improvised explosive device worn by an attacker," General Myers said. Officials initially suspected a rocket or mortar strike had been launched by insurgents outside the base.

The Pentagon finding tallies with the claim of an Islamic radical group, the Army of Ansar al-Sunna, that the attack was an act of "martyrdom". ABC Television News reported that investigators had discovered remains of a torso and a backpack that could have belonged to the person who detonated the bomb, as well as shrapnel of a type found in other suicide bombings.

The full impact of the attack began to sink in yesterday as television showed the first somber pictures of some of the dozens of Mosul wounded being carried off a military transport plane at the US Air Force base at Ramstein, Germany. Eight of the injured are said to be in critical condition, raising fears that the death toll may rise further.

The official response here is that the US will not be cowed into postponing next month's scheduled elections ­ still less into a premature exit from Iraq. But the incident, the deadliest single strike at a US facility during the 20-month occupation, is bound to increase doubts about the entire Iraq mission. Even before the attack, an unprecedented 56 per cent of Americans felt the invasion had been a mistake, a poll this week found.

Now even sharper questions are being posed. How, The New York Times asked yesterday, "can the United States ­ with the help of Iraqi security forces whose performance has been uneven at best ­ assure the safety of Iraqis who go to the polls on January 30 when it cannot keep its own troops safe on their own base?"

Meanwhile a big US contractor has pulled out of the $20bn (£12bn) reconstruction effort. According to The Los Angeles Times, Contrack International, which heads a partnership that won a $325m contract, one of 12 major reconstruction contracts awarded this year, has stopped work on the project because of "prohibitive" security costs.

The deal is the largest so far in Iraq to fall victim to the insurgency. The fear is that other companies may follow Contrack's example, or decline to tender for work, further imperiling the prospects for reconstruction.

For Mr Bush ­ described by one visitor to the Oval Office as "distraught" by the carnage ­ the onrush of events could not happen at a worse time. At his press conference a day before the attack, he admitted the insurgency was "having an effect", but vowed the elections would go ahead on schedule.

Now, the attack could further undermine support for Donald Rumsfeld, the Defense Secretary, widely blamed for not sending enough troops to Iraq, and for not ensuring adequate protection for those who are there. Even worse, the President's ambitious domestic agenda could be at risk if the Iraq crisis spirals out of control.

The Pentagon says it expected attacks on both US troops and Iraqi officials working with Americans in the run-up to the elections. But the attack in Mosul has nonetheless come as a dreadful shock, made even worse amid the festivities of Christmas. Some American media have suggested it could be a watershed in the unhappy history of post-Saddam Iraq.

© Copyright 2004 lndependent Digital (UK) Ltd

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