Administration and congressional officials briefed on the plan said on Tuesday that it cleared the way for President George Bush, who was campaigning in Michigan, to write off 95% of Iraq's prewar debts to the US totalling about $4 billion.
The changes, which will require congressional approval, reflect a view within the administration that without better security, long-term rebuilding is impossible.
Of the more than $18 billion approved for Iraq's reconstruction, only about $1 billion has been spent so far.
"This is adjusting a plan in response to changing circumstances," said a US official who asked not to be named.
"One of the changing circumstances is the need to focus more urgently and more quickly on developing Iraqi security capability. Another is the need to accelerate employment of Iraqis."
Many parts of Iraq experience
daily power outages
According to a document outlining the plan, the administration would shift $1.8 billion now earmarked for water, sewage and electricity projects to expand security forces.
This would include adding 45,000 Iraqi police officers and 16,000 officials for border enforcement.
Another $180 million would help plan for elections and strengthen local governments.
The number of US troops killed since the March 2003 invasion passed the 1000 mark last week, while the number of wounded topped 7000, and administration officials say the anti-US conflict may intensify in the months ahead.
White House national security adviser Condoleezza Rice told CBS's Face the Nation on Sunday that "there will undoubtedly be violence up until the elections and probably even during the elections".
The administration will also channel $450 million from refined oil purchases to expand Iraq's oil capacity.
The document said the funds would be used for "specifically targeted oil infrastructure projects that will increase Iraqi oil production by 650,000 barrels per day by mid-2005".
The Bush administration wants to expand oil production and exports at the Kirkuk oilfield, including building a new pipeline and improving facilities at Rumaylah oilfield.
The Bush administration wants
to increase oil production
A further $380 million would be used to boost economic development. Some of that money would also be handed out in resettlement aid to 300,000 Kurds. A separate $286 million would help expand job training programmes.
The administration would set aside $360 million to cover the "budget cost" of writing off 95% of Iraq's debt to the US, which was largely run up during the 1980s.
The Bush administration is required to seek congressional approval for major changes in Iraq's reconstruction package, but congressional aides say the White House now wants to ease those restrictions.
One aide complained that the administration was effectively seeking a "blank cheque" to spend the money with minimal oversight.
Without authorisation from Congress, the administration would only be able to shift $800 million of the requested funds, the document said.