A State Department draft report recommends that Panama, whose military leader is under federal indictment in Florida on drug-related charges, be certified as cooperating in the worldwide U.S. fight against illegal drugs because "other national interests" prevent punitive action against the country, an administration official said yesterday.

The draft report said that although Panama and Mexico have failed to take adequate steps against narcotics, they should not be penalized under a 1986 federal law requiring the president to certify that countries where drug trafficking occurs are "fully cooperating" with eradication efforts.

If a country fails to win certification, it loses American military and economic aid, and trade preferences. In addition, the United States is required to vote against all loan requests for those countries before international lending agencies.

The United States froze aid to Panama after a pro-military mob attacked the U.S. Embassy in June. Thus, the certification for that nation is largely symbolic.

"This is absolutely mind boggling . . . inexcusible . . . indefensible . . . defies logic . . . and is the biggest nonwinner there is," Sen. Alfonse M. D'Amato (R-N.Y.) said.

"I think we'll turn it around. It is only a draft, but if the president signs off on it, it could just be the death knell of any so-called war on drugs," D'Amato said.

"If -- and I stress the if -- the administration intends to certify Panama, it flies in the face of stated congressional intent to cut off aid and recent evidence that is shocking to say the least," said Sen. John F. Kerry (D-Mass.), who recently finished hearings into the alleged drug-trafficking activities of Gen. Manuel Antonio Noriega, the Panamanian strongman. Noriega, indicted by two U.S. grand juries in Florida on drug-smuggling and related charges, has denied involvement in illicit activities.

D'Amato said he intends to bring the matter to the attention of White House chief of staff Howard H. Baker Jr. on Monday in an effort to turn around the recommendations in the State Department's Bureau of International Narcotics Matters' draft report.

The proposal "represents the current thinking of one bureau" in the State Department, according to an official, but has not been approved by Secretary of State George P. Shultz or the White House. The National Drug Policy Board, which sets U.S. drug-war policy, must also approve the report. The president is expected to announce his decision March 1.

The draft report, which was reported in yesterday's New York Times, recommends that Iran, Afghanistan, Paraguay, Syria and Laos be decertified, a state department official said.

Panama was reluctantly recommended for certification, one administration official said, because of "national security considerations." He declined to elaborate.

Mexico, according to the official, is cooperating with U.S. efforts in cracking down on drugs to a "greater degree than they have in several years."

The official complained that the law's requirement that a nation be "fully cooperating" in drug-enforcement efforts creates problems for the State Department. He noted that Mexico, for example, could argue that the United States is not fully cooperating because it has not eliminated the insatiable demand for drugs in this country.

In addition to Panama and Mexico, where "national interests" were cited, the draft report recommends that the Bahamas, Columbia and Bolivia be certified.

Kerry called the certification of the Bahamas "just wrong." He noted that last week a Florida court heard evidence of an alleged drug involvement by the Bahamian prime minister.

Columbia is a "difficult, complicated" case, he said. "The intent to cooperate has to be distinguished from the ability to cooperate."

Kerry said that if the draft certification report is approved, "we're going to fight it" by "holding hearings, looking at the evidence and going from there."