Bush is being urged to give up to $10 billion (£5.1 billion) to Iraq as part of a “New Deal” that would create work for unemployed Iraqis, following the model of President Franklin D Roosevelt during the 1930s depression.

At the Pentagon, the joint chiefs of staff are insisting on reconstruction funds as part of a package of political and economic measures to accompany the armed forces. They fear the extra troops will be wasted and more lives lost if Bush relies purely on the military to pacify Iraq, according to sources close to General Peter Schoomaker, the army chief of staff.

Military commanders have come round to the idea that an increase of troops is likely to form the backbone of Bush’s new strategy on Iraq. “People are warming to the idea that some sort of surge is necessary,” said a military official.

Robert Gates, the defence secretary, held talks with Bush, Condoleezza Rice, the secretary of state, and Stephen Hadley, the national security adviser, at Camp David yesterday, where he reported back on his three-day tour of Iraq. He said the willingness of Iraqis to “step forward” had advanced significantly.

Newt Gingrich, the former Republican Speaker of the House and a member of the defence policy board advising the Pentagon, is calling for a cross between the New Deal and the post-second world war Marshall Plan that would “mop up every young Iraqi male who is unemployed”. He said it would be “as big a strategic step towards victory as whether you have more troops or fewer troops”.

Gingrich believes his position as a staunch conservative could help to sell the reconstruction package to sceptical Republicans who argue that Iraq has already cost too money. The Pentagon this month requested an extra $100 billion from Congress as an emergency supplement to the 2007 military budget, bringing the total to $663 billion.

Americans have already spent nearly $40 billion on economic aid for Iraq, much of which has been squandered. Bush’s proposals are likely to be more modest than the former speaker’s but he has been listening carefully to advice from generals such as Peter Chiarelli, who stepped down as head of the multinational forces in Iraq last week. He believes a US-funded, Iraqi-led job creation programme is essential to weaken the power of militias.

Bush is also thought to have been influenced by advice from retired General Jack Keane and Frederick Kagan, author of Choosing Victory, published by the American Enterprise Institute, a neoconservative think tank. The report, which advocates more troops, argues that “reconstruction is a vital part of stabilising and securing the Iraqi population”.

“The military commanders have been emphasising this heavily,” said Kagan. “It is tremendously important. We’re proposing that an economic team goes automatically into areas where the troops are sent in.”

The plan is to extend significantly Chiarelli’s innovative use of Sweat teams (responsible for sewage, water, electricity and trash) to back up military operations.

Local leaders will be asked what they need to improve the quality of life in their neighbourhoods and the unemployed will be put to work. According to Kagan, the scale of the package should be linked to the degree of co-operation over disbanding militias and providing intelligence about insurgents.

Stephen Biddle, a military expert at the Council on Foreign Relations, who recently advised Bush at the Oval Office, is backing plans for economic reconstruction but is sceptical about its chances of success.

“If Sunni death squads are murdering your relatives and you’re afraid they will slaughter you if you compromise with the Americans, promising to rebuild the local health clinic won’t help,” he said.

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