Among the sanctions being considered are restrictions that would effectively isolate Syria's banks and prohibit US financial institutions from dealing with them.

 

"The US government is concerned that the Iraqi insurgency is being partially fuelled by sources within Syria," Stuart Levey, the US Treasury's undersecretary for the Office of Terrorism and Financial Intelligence, said on Wednesday.

 

"The Treasury has already used Patriot Act authorities to begin financially isolating the Commercial Bank of Syria and is determining how best to use that and other economic powers to pressure Syrian action to combat insurgency financing through their country. To date, they have not done what they need to do," he said.

 

Military options open

 

The statement comes after US Deputy Secretary of State Richard Armitage's recent visit to Damascus.

 

After his 2 January visit, Armitage said Syria was improving its control over its borders with Iraq but there was still more work to be done.

 

The Commercial Bank of Syria is the single, government-owned bank specialising in servicing foreign trade and commercial banking, including foreign exchange transactions.

 

Military options have also not been ruled out.

 

Sources familiar with the topic said the administration was also debating whether the US military could cross the Syrian border from Iraq while in "hot pursuit" of wanted fighters.

 

"Additional sanctions under the Syrian Accountability Act are under consideration," a senior Bush administration official said.

 

Accusations denied

 

Washington has repeatedly threatened new sanctions against Syria for its alleged support of anti-US fighters and suspected interference in Iraq, most recently last month.

 

While Syria has taken some action, the senior administration official said: "They need to do more to reform their regime."

 

"The Treasury Department is now involved in very, very serious and candid talks and negotiations with the ministry of finance in Syria regarding the Iraqi assets"

Ammar Alarsan, Syrian embassy spokesman in Washington

A spokesman for Syria's embassy in Washington denied Damascus was serving as conduit for funds, and called on the US to provide proof for its allegations.

 

He said Syria had repeatedly been the target of unfounded accusations which later turned out to be false.

 

Embassy spokesman Ammar Alarsan said Syria and the US were in talks about resolving the controversy.

 

"The Treasury Department is now involved in very, very serious and candid talks and negotiations with the ministry of finance in Syria regarding the Iraqi assets ... and what they called the insurgency and money transferred between Iraq, Syria or anywhere," Alarsan said.

 

The US State Department calls Damascus a sponsor of "terrorism" and as such has subjected it to limited sanctions for years.

 

President George Bush's administration imposed additional measures last year that prohibit exports to Syria of most goods.

 

The additional Treasury sanctions under consideration are linked to its designation in May 2004, of the Commercial Bank of Syria as a "primary money laundering concern".

 

In conjunction with the May designation, the Treasury formally proposed rules that would prohibit any US bank, broker-dealer, futures commission merchant and mutual fund from opening or maintaining an account for or on behalf of the Commercial Bank of Syria.

 

Treasury now has the authority to activate that proposed rule, which could provide leverage in talks with Syria.