Paul Volcker's investigating panel on Wednesday said the rationale used by the United Nations to justify paying Benon Sevan's (search) legal fees in the Oil-for-Food probe is "incorrect."

The assessment follows the announcement Tuesday that the United Nations agreed to reimburse Sevan, the suspended head of the U.N. Oil-for-Food program (search) in Iraq, for legal fees he incurred during an investigation into allegations of fraud in the operation.

Payment for Sevan's legal fees was to come out of the account containing the 2.2 percent of Iraqi oil revenues from the $64 billion program earmarked for its administration, said U.N. spokesman Fred Eckhard.

Sevan's fees are to be reimbursed with Iraqi oil funds set aside to help administer the program. That means Iraq oil money would essentially pay for Sevan to defend himself against charges that he bilked the program.

Eckhard said the United Nations (search) had agreed to pay reasonable legal expenses until Feb. 3, when Volcker's investigation accused Sevan of a conflict of interest administering the program.

"When that report came out and made specific charges against Mr. Sevan, we informed him at that point that we would not reimburse him for any legal fees that he incurred subsequent to the leveling of charges against him," Eckhard said.

Volcker's Independent Inquiry Committee (IIC) was tapped by U.N. Secretary-General Kofi Annan, to investigate the billion-dollar scandal.

Michael Holtzman, spokesman for the IIC, said in a statement Wednesday, that Sevan was allowed legal counsel because he was the "single individual against whom the most serious and direct allegations of corruption had been made, as of that time."

He added: "This exception was not motivated, as suggested by the United Nation's statement, by a desire to induce Mr. Sevan to cooperate. The IIC has at no time proffered an opinion on the payment of Mr. Sevan's legal costs."

The plan to reimburse Sevan, first reported in the New York Sun on Tuesday, is almost certain to raise new questions about the United Nations' handling of the Oil-for-Food (search) program and draw new criticism from U.S. congressional investigators also examining its operation.

The issue has become a lightning rod for U.N. critics, who say the world body bungled the handling of the Oil-for-Food and accused officials of massive corruption — though that has not yet been proved.

Eckhard said Annan's decision to reimburse Sevan was "exceptional" and stressed that no money had been paid so far.

"When I said it's exceptional it's exactly that — it starts and stops with Benon Sevan," he said.

In a statement released later Tuesday, Eckhard said some of the bills Sevan had submitted were being questioned because they didn't all relate to his cooperation with the investigators.

The statement said Sevan had requested the reimbursement and the U.N. Office of Legal Affairs agreed because it wanted the investigation to "operate smoothly with the full cooperation of Mr. Sevan."

It also justified the decision by saying Sevan was a retired staff member not subject to Annan's instruction that all staff cooperate "on pain of dismissal." Sevan, however, has been kept on the U.N. payroll for a dollar a year, specifically so he would be obliged to talk to the investigators.

The Oil-for-Food program ran from 1996-2003. It was designed to let Saddam Hussein's government sell oil in exchange for humanitarian goods as an exemption from U.N. sanctions imposed in 1991 following Iraq's invasion of Kuwait.

In a bid to curry favor and end sanctions, Saddam allegedly gave former government officials, activists, journalists and U.N. officials vouchers for Iraqi oil that could then be resold at a profit.

Sevan and Joseph Stephanides (search), head of the U.N. Security Council Affairs Division who dealt with Oil-for-Food contracts, were charged with violating U.N. rules after the Volcker report was issued.

The Associated Press contributed to this report.