The European Union (search) said Wednesday it would examine whether the United States violates world trade rules with its decision to bar countries that opposed its war in Iraq from bidding for $18.6 billion worth reconstruction contracts.

France, Germany and other U.S. allies were angered and surprised by the Pentagon decision — which forbids bids by countries with no troops in Iraq — seen as a slap after efforts to patch up the trans-Atlantic divisions over the Iraq war.

Canada suggested it might halt further aid to Iraq, and Russia issued an implicit threat that it would take a harder line on the restructuring of Iraqi debt that Washington seeks.

"I find it really very difficult to fathom," Canada's incoming prime minister, Paul Martin (search), said of the Pentagon order. Martin, who takes office Friday, said he was "disappointed" — particularly since Canada has pledged about $225 million for Iraq and has troops in Afghanistan.

In light of the order, "it would be difficult for us to give further money for the reconstruction of Iraq," said Canada's deputy prime minister, John Manley.

The EU executive body, the European Commission (search), said it would study whether the order violates World Trade Organization (search) rules.

"We are asking the U.S. to provide us with information so we can see whether or not their commitments with regard to the WTO have been respected," said Arancha Gonzalez, trade spokeswoman at the European Commission.

She said the 26 contracts listed on the Pentagon Web site would be examined to see what they cover and whether national security exemptions would apply.

The White House on Wednesday firmly defended the policy, announced in a directive from U.S. Deputy Defense Secretary Paul Wolfowitz posted a day earlier on the Pentagon Web site.

"I think it is appropriate and reasonable that prime contracts for reconstruction funded by U.S. taxpayer dollars should go to the Iraqi people and those countries who are working with the United States on the difficult task of helping to build a free, democratic and prosperous Iraq," spokesman Scott McClellan said.

Countries that want to be eligible for bidding should participate militarily, McClellan said — or they can donate aid.

The directive limits bidders for 26 lucrative contracts in Iraq to firms from the United States, Iraq, their coalition partners and other countries which have sent troops to Iraq.

It says restricting contract bids "is necessary for the protection of the essential security interests of the United States." Countries that did not sent troops would be eligible for subcontracting work in Iraq.

Wolfowitz wrote that the restrictions would encourage other countries to join the coalition in Iraq. But the initial reaction from other nations pointed more to a backlash.

Germany called the decision "unacceptable." Government spokesman Bela Anda said the decision went against "a spirit of looking to the future together and not to the past" after the deep trans-Atlantic rift over the Iraq war.

German Foreign Minister Joschka Fischer, meeting with his Russian counterpart in Berlin, said he received the news "with astonishment."

In Moscow, Russian Defense Minister Sergei Ivanov, when asked about the Pentagon decision, responded by ruling out any debt write-off for Iraq.

"Iraq's debt to the Russia Federation comes to $8 billion and as far as the Russian government's position on this, it is not planning any kind of a write-off of that debt," he said. "Iraq is not a poor country."

Russian officials have rejected calls by U.S. officials for a complete write-off of Iraq's debt, much of it left over from the Soviet era, but President Vladimir Putin and others have said in the past that they were willing to consider restructuring the debt.

Ivanov appeared to be threatening to take a harder line on restructuring. He did not comment directly on the U.S. decision, but he said that "Russia has great economic interest in Iraq."

In Berlin, Russia's foreign minister, Igor Ivanov, said the decision contradicted earlier promises by President Bush.

Bush "has stressed several times that ... the Iraqi people themselves should make decisions about their resources," the foreign minister said at the press conference with Fischer.

German and French companies, which have a long history of working in Iraq, have already had low hopes of getting contracts, though some subcontracting has already gone their way.

French telecom giant Alcatel recently became the first French firm to win work in Iraq, winning a subcontract to carry out a third of the two-year contract awarded to Egyptian group Orascom to build a new mobile phone network for central Iraq, including Baghdad. U.S. firm Motorola is the other major partner in the deal.

A leading German industry group said the Pentagon decision seemed in breach of fair-bidding principles for public works agreed among rich nations.

"We suspect that in substance it contradicts the OECD principles for international tenders for public projects, although the United States in particular always calls for observing these principles," said Ludolf von Wartenberg, general manager of the Federation of German Industry.

Over more than a century, Germans built much of modern Iraq — from Baghdad-Istanbul railway to the central bank building in Baghdad and the national university, along with dams, bridges, roads and canals.