The decision on Wednesday came as a boost for President George Bush, as Congress prepared a final $87 billion bill for Iraq and Afghanistan.
The White House had threatened to veto the entire bill if Congress did not agree to give Iraq nearly $20 billion in reconstruction funds.
The US Senate had earlier passed a plan that would have turned half of that amount into loans.
Republicans from the Senate Appropriations Committee voted against including loans in the final bill, as House of Representatives and Senate members met to resolve differences.
The measure was not in the House bill, so the loan provision was eliminated from the final bill.
US lawmakers want Iraq to use
With that key hurdle passed, negotiators from the Appropriations Committees of each chamber hoped to agree on a bill later in the day.
Both the House and Senate are expected to approve the final Iraqi aid package easily, despite broad support among lawmakers to make Iraq use its potential oil wealth to repay reconstruction money.
The negotiators had approved with little debate the nearly $67 billion to keep US troops in Iraq and Afghanistan.
White House pressure
Bush had argued that seeking repayment would burden Iraq with more debt, slow efforts to stabilise the country and prolong the US occupation.
Under intense White House pressure, two Senate Republicans who said they would push for loans – Sam Brownback of Kansas and Ben Nighthorse Campbell of Colorado – backed down to give Bush the win.
One Democrat, Senator Daniel Inouye of Hawaii, also voted against loans.
Republicans who backed loans said they would support the final package, even if the repayment measure was eliminated.