The leader of an Islamic charity today pleaded guilty to illegally diverting contributions intended for the poor to armed fighters in Bosnia and Chechnya as part of a plea agreement in which prosecutors dropped all terrorism-related charges against him.

In a sudden end to the first high-profile prosecution of an official of a U.S.-based Muslim charity, the government also agreed to reduce Enaam Arnaout's potential 20-year prison sentence if he cooperates in future terror investigations.

The plea bargain came after a judge ruled last week that prosecutors had failed under the rules of evidence to show why the assertions in a 102-page document should be brought before a jury. That filing sought to show intimate ties between Arnaout's foundation and the al Qaeda terrorist network, as well as other extremist groups, over a 15-year period.

"It's a victory for the government because if he knows as much as they allege, his cooperation could be helpful," said Mark Flessner, a former assistant U.S. attorney in Chicago. "But this agreement is also a clear indication that the government's case was troubled. What this was was a fraud case that they tried to make into a terrorism case."

Arnaout, 40, admitted in federal court that, as head of the Benevolence International Foundation, he solicited money to help orphans and widows that was then used to buy boots, tents, uniforms and an ambulance for fighters in Bosnia-Herzegovina. He also used charity funds to purchase uniforms for fighters in Chechnya.

But he did not concede that his $4 million-a-year charity was connected to terror in any way. His attorney told reporters that the deal was proof that Arnaout "had nothing to do with terrorism."

Attorney General John D. Ashcroft, who flew here in October to announce Arnaout's indictment, disagreed, saying that the case represents an important step in the nation's effort to dry up what he has previously called "terrorist blood money."

"Arnaout defrauded donors by using their money to fund jihad fighters in Chechnya and Bosnia," Ashcroft said. "All of these were purchased with funds that donors thought were going for peaceful purposes. While Mr. Arnaout has not admitted to supporting al Qaeda in this plea agreement, the government stands strongly behind those allegations. We are prepared to prove that he did support al Qaeda when that issue is addressed at sentencing."

Patrick Fitzgerald, U.S. attorney for the Northern District of Illinois, said the government's actions were justified by today's guilty plea. "Mr. Arnaout told a judge he was guilty," Fitzgerald said. "We would be crazy not to take the deal. We're getting an admission of guilt and a chance to go on with other cases. We are not apologetic."

A naturalized U.S. citizen born in Syria, Arnaout was arrested April 30 as he sought permission to visit his sick mother in Saudi Arabia. At the time, he was under round-the-clock FBI surveillance, and authorities felt that if he were allowed to leave, he might never return.

Prosecutors charged that Arnaout was among a small group of activists who traveled to places such as Pakistan, Afghanistan, Sudan, Bosnia and Chechnya, providing guns and supplies to al Qaeda members and local warriors.

Through his attorneys, Arnaout contended that the government searches of his home and office and the seizure of his charity's assets were "heavy-handed" and that he had done nothing wrong.

His case received a boost last week when U.S. District Judge Suzanne B. Conlon all but threw out the document intended to lay out the government's argument of what it planned to prove at trial. Prosecutors had argued for an exception from rules that prohibit the use of hearsay evidence.

Conlon said the information was not admissible, suggesting it was too anecdotal. Dates were difficult to surmise, she said, and the authors of statements and documents were often not identified. "The proffer is devoid of analysis linking proffered hearsay to a specific conspiracy," she said.

Today, however, Arnaout stood before Conlon and admitted his guilt to one count of racketeering on the day his trial was scheduled to begin. In the signed 12-page agreement, Arnaout said that Benevolence International was established in 1992 and received its tax-exempt status for charitable organizations a year later. Once that happened, Arnaout said, he began seeking donations, concealing from donors and government officials the fact that a portion of the money was helping fund armed struggles overseas.

The government, in return, dropped six other charges, including money laundering, wire fraud and conspiracy to provide material support to terrorists.

The case first became public in December 2001, when offices of the foundation in suburban Chicago and Newark were searched, along with Arnaout's home. The foundation's assets were frozen at the same time. The charity filed suit against the government in late January seeking the return of its property.

Government attorneys subsequently used the filings associated with that suit to charge Arnaout. In an April court filing, Arnaout contended that "BIF has never provided aid or support to people or organizations known to be engaged in violence, terrorist activities, or military operations of any nature." Later that month, he was charged with perjury and has since been held without bond.

Enaam Arnaout, right, enters his plea before Judge Suzanne B. Conlon and U.S. Attorney Patrick Fitzgerald.