By 95-0 the Senate voted to add the $25 billion to a measure laying out overall defence budgets next year.
But while Bush wanted to decide how the entire $25 billion would be spent after simply informing Congress, the Senate would let him do so with just $2.5 billion and divided the rest among broad but specified accounts.
US lawmakers are concerned about the approval of the $25 billion reserve fund after reports that some of the funding was used for security and administration instead of rebuilding the country.
White House spending on Iraq has come under scrutiny from lawmakers after reports that some of the funding set aside for rebuilding the country had been used for other purposes such as security and administration.
In the wake of the scandal over abuse of Iraqi detainees at a US prison near Baghdad, the House committee's bill also requires the Pentagon to report by 1 February on the treatment of prisoners in its custody.
No broad leeway
A powerful senator from President Bush's own party rejected his administration's request for broad leeway on the $25 billion reserve fund and said on Wednesday he intends to limit how the money can be used.
"We expect this to be used only for Afghanistan and Iraq," declared Republican Senator Ted Stevens of Alaska, the chairman of the Senate Appropriations Committee, which approves government spending and oversees the federal budget.
Stevens told administration officials at a hearing: "Some of my colleagues have said that you're asking us to give you a blank cheque because of the word 'may' in this provision. I would intend to change that to say it 'shall' only be used for these accounts."
The emergency reserve fund is intended to finance military operations in the two countries until the White House makes a separate request for a larger supplemental spending bill early next year.
"Some of my colleagues have said that you're asking us to give you a blank cheque because of the word 'may' in this provision. I would intend to change that to say it 'shall' only be used for these accounts"
Separately, a subcommittee of the House Appropriations Committee approved a $416 billion defence spending bill for the next fiscal year that breaks the $25 billion reserve fund into 22 separate accounts and demands detailed reporting of how the money is used.
It provides a $1 billion discretionary fund, and leeway to shift another $2 billion with congressional oversight.
Stevens said $14 billion of the reserve fund would be used for military operations and maintenance, $6 billion would be divided between the Navy, Air Force, Marines and Defence Squad while $5 billion will be used for other Defence Department purposes related to Afghanistan and Iraq.
Congress has so far sent the White House about $160 billion for Iraq and Afghanistan.
Until early May, when it suddenly asked for the $25 billion, the Bush administration had insisted it would not seek more money for Iraq until next year.
That would have put off debate on the issue until after the November presidential election, but pressure from the military and deteriorating security in Iraq forced the request.
Republicans, who control the Senate, said they would try to move quickly on the request in case the Pentagon, anticipating more violence in Iraq, needs the money before the start of the new fiscal year in October 2004.