Prosecutors said on Thursday the charges relate to a fuel supply contract for military operations in Kuwait.

The indictments came two days after the Pentagon said military auditors still had major issues with Halliburton and three days after Democratic congressmen released an audit questioning $108 million in costs by the firm.

Jeff Alex Mazon, formerly of Halliburton's Kellogg, Brown & Root (KBR), and Ali Hijazi, managing partner of LaNouvelle General Trading and Contracting Co of Kuwait, were indicted on 10 counts of fraud by a federal grand jury in Illinois, the Justice Department said in a statement.

The indictment alleges Mazon inflated a bid for fuel tankers he received from Hijazi, to make sure LaNouvelle would be overpaid, while also inflating a Kuwait company's competing bid without the rival's knowledge, to make sure LaNouvelle's inflated bid would be the lower of the two.

Halliburton reaction

Halliburton, commenting on the indictments, said its own internal auditors had caught the possible wrongdoing more than a year ago. The company immediately reported it to the Department of Defence and the Justice Department, company spokeswoman Wendy Hall said.

KBR is one of the US military's
main supply contractors in Iraq

Mazon, 36, was arrested on Wednesday and was scheduled to make an initial appearance in federal court in Atlanta. Hijazi, who does not reside in the United States, has not been apprehended, the Justice Department said.

Mazon worked in Kuwait as KBR's procurement materials and property manager from December 2002 to June 2003. US-led forces invaded Iraq in March 2003.

Texas-based Halliburton was run by Vice President Dick Cheney from 1995 to 2000, when he joined the race for the White House.

The Bush administration has faced consistent accusations of favouring Halliburton with huge military contracts because of its ties.