CRAWFORD, Texas/WASHINGTON - The Bush administration is considering whether it can provide money to help demobilize Colombia's largest far-right paramilitary army despite its official designation by Washington as a foreign terrorist organization, U.S. officials said on Tuesday.

The proposal faces political and legal hurdles as President Bush campaigns for re-election on his hard-line stance against terrorism.

Still, the effort has generated support within the State Department, and congressional sources interviewed this week said the U.S. Embassy in Colombia had asked the Justice Department whether U.S. taxpayer funding could legally be used for the demobilization of the outlawed United Self-Defense Forces of Colombia, or AUC.

"We are considering how to support the government of Colombia's efforts to demobilize the AUC. No decision has been reached. ... We are mindful that we have to stay within certain legal and policy parameters," said a U.S. official who asked not to be named.

Proponents say the money would help bolster Colombia's talks to disarm the country's 20,000 paramilitary gunmen, members of right-wing militias funded by drug trafficking who kill guerrillas and anyone suspected of sympathizing with them.

Colombia has appealed for up to $150 million in international aid to pay for the demobilization effort. The process includes rehabilitation classes aimed at preventing the retired fighters from returning to crime.

Colombian's chief peace negotiator has estimated the cost of demobilizing each combatant at $7,285 (20 million Colombian pesos).

POLITICALLY RISKY FOR BUSH

The 40-year-old guerrilla war is the longest-running conflict in the Americas and claims thousands of lives a year. The paramilitaries are blamed for many of Colombia's worst human rights abuses.

But the proposal to use U.S. taxpayer funds to demobilize the AUC could run afoul of U.S. laws that prevent money from flowing to groups deemed terrorist organizations, prompting a review of the legal issues.

Under U.S. law, anyone who provides "material support or resources" to a foreign terrorist organization can be subject to fines and to a prison sentence of up to 15 years. If someone dies as a result, they can get life imprisonment.

The effort could also be politically risky for Bush in an election year. He has vowed never to negotiate with terrorists "in Afghanistan, Iraq, and elsewhere," and told a campaign rally last week: "You can't talk sense to these people. You can't negotiate with them. You cannot hope for the best. We must engage these enemies around the world."

A congressional aide briefed on the proposal summed up Bush's dilemma. "When is a former terrorist no longer a terrorist?.. And they (AUC leaders) are not just terrorists. They're drug dealers," the aide said.

In June, U.S. Drug Enforcement Agency Administrator Karen Tandy told Congress that the AUC is "inextricably linked to the drug trade," and cited recent indictments against its leaders.

Sources said it was unclear how much money could be involved in any demobilization deal and added it would depend on the number of fighters and could amount to up to hundreds of millions of dollars over several years.

The AUC said earlier this month that it would demobilize almost a third of its fighters -- three units totaling about 6,000 fighters -- after the Colombian government threatened to kick them out of national peace talks.

"The Colombians are going ahead with it no matter what, whether we give them money or not," a congressional source said.

The United States provides Colombia with about $700 million in mainly military aid each year, largely to combat the world's biggest cocaine trade. It has said in the past that it is "skeptical" about the AUC's desire for peace and has insisted it wants to extradite top AUC leaders for cocaine trafficking.

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