Iranian Leader, in Baghdad, Hails 'New Chapter' in Ties with Iraq

"The intent has not changed -- populating Iraq with highly trained militants," said a senior U.S. military official who spoke on the condition of anonymity because of the sensitivity of the issue. "Iran does not want to see coalition forces in this relationship with Iraq on a positive footing. Its greatest goal would be to embarrass the West."

In Iran, a closer relationship with Iraq is seen as an economic opportunity and a chance for Iran to wield greater regional influence through its Kurdish and Shiite allies in Iraq, according to interviews with Iranian officials and analysts.

But a backlash could also result inside Iran from the government's assistance to Iraq. Many Iranians want compensation for attacks on civilians committed by Hussein's government during the 1980s. Iran's billion-dollar loan could cause tension.

"Iranian people will not be happy with that," said Davoud Hermidas Bavand, an international law professor at Allameh Tabatabi University in Tehran. "Still, it's the policy of the current Iranian government to build stronger relations between the two countries on an economic basis. A loan could be useful for that."

Nowhere is Iran's growing influence more visible than in the southern city of Najaf, where as many as 2,000 Iranian pilgrims arrive daily to pray at the Imam Ali shrine, one of the world's holiest Shiite shrines.

"All the economy in Najaf -- the grocer, the butcher, the cloth sellers, everything in Najaf, even the juice stores and the restaurants to the pushcart vendors -- they all rely on the Iranian pilgrims," said Qassim al-Shibly, 30, owner of a jewelry store.

Ahmed Duaibel, spokesman for the Najaf Governorate, said Iranian government grants have paid for reconstructing sections of the Imam Ali shrine. Iranian funds have provided the city with garbage trucks and built an eye and kidney hospital, a medical clinic, a telecommunications center and a power station.

"There are also lots of projects which will be accomplished and there are lots of agreements with Iranian companies," Duaibel said.

Among Iraq's leadership, reaction to Ahmadinejad's visit was mixed, differing by sect.

"The Kurds should look at the broader picture. You have 53 Islamic countries in the world. Only Iran is led by Shiites. All the others are Arab Sunnis," said Mahmoud Othman, an influential independent Kurdish politician. "I hope we get closer together. We help their ambitions and they help our ambitions."

Adnan al-Dulaimi, the head of the Iraqi Accordance Front, the largest Sunni bloc in parliament, said the best evidence of Iran's growing influence in Iraq is that U.S. officials have engaged in talks with Iran in order to stabilize Iraq.

"This is like a kind of international confession that Iran has an enormous influence and role inside Iraq," Dulaimi said.

Shiite leaders said they hoped Iraq's other neighbors will forge closer ties with the Iraqi government.

"The visit of the President Ahmadinejad is a good step," said Falah Hassan Shanshal, a Sadr legislator. "We really need to start a new page, especially with the neighboring countries. We need those countries not to interfere with our internal affairs."

Correspondent Thomas Erdbrink in Tehran and special correspondents Saad al-Izzi and Zaid Sabah in Baghdad and Washington Post staff in Najaf and Diyala province contributed to this report.