AL-QAEDA terrorists who have infiltrated Iraq from Saudi Arabia and other Arab countries have formed an alliance with former intelligence agents of Saddam Hussein to fight their common enemy, the American forces.

The alliance, known as Jaish Mohammed — the army of the prophet Mohammed — is believed to be responsible for increasingly sophisticated attacks on US soldiers. In the past four months it has smuggled millions of dollars, weapons and hundreds of Arab fighters across the desert border with Saudi Arabia.

Details of the alliance have emerged from Iraqi intelligence and US military sources, and from local supporters in a belt of restive Sunni Muslim towns to the west of Baghdad.

Influenced by Wahhabism — a fundamentalist strain of Islam followed in Saudi Arabia and by Osama Bin Laden — it represents a new force for Al-Qaeda in its holy war against the US. The group is led by a top Saudi Al-Qaeda officer, while most of the lieutenants and foot soldiers are Iraqis, who can move easily among the locals.

The Sunday Times has obtained the name of the leader but has been asked not to publish it for fear of jeopardising security operations. He does not direct every attack, but oversees training and ensures cells follow his commands about targets.The Saudi relies for planning, logistics and recruitment on two former Iraqi intelligence officials, including Mohammed al-Kudier, a former director of special operations in Saddam's Mukhabarat security service.

According to the sources, they run a training camp at Razaza, 30 miles from the town of Ramadi, at a former lakeside resort that Saddam turned into a base for army manoeuvres. Last Friday a driver was shot and killed on a nearby road.

The new threat to the Americans was disclosed yesterday as British troops in Iraq's second city of Basra came under attack from a mob complaining about petrol and power shortages in temperatures of 57C (135F). Three soldiers from the Queen's Lancashire Regiment were hit by stones but were not seriously injured.

Jaish Mohammed seems to analysts to be an improbable alliance. Al-Qaeda was formed by Bin Laden to drive American forces from Saudi Arabia, home to the two holiest sites in Islam. Saddam's ruling Ba'ath party was deeply secular.

There was deep scepticism in the run-up to the war when the administration of President George Bush alleged that there were links between Saddam and Bin Laden, who directed the September 11 terror attacks.

But a different kind of co-operation is emerging in Iraq, driven by a mutual hatred of the West, particularly the Americans and British.

For the Arab foreigners in Jaish Mohammed, the alliance is a jihad, similar to that forged by Bin Laden and his allies to expel Soviet forces from Afghanistan. According to those who know them, the Iraqis have joined for a combination of religious and nationalist reasons.

The Saudi Al-Qaeda officer, who moves across the border but was believed to be in Iraq last week, is supported by wealthy Saudis rather than the Riyadh government. His Iraqi partners recruit from the pool of security and intelligence officers who are unemployed and embittered by their loss of status.

Recruits are selected for their religious tendencies and weapons skills. After vetting, they begin Al-Qaeda-style training, such as how to make remote-controlled bombs. They then stay in safe houses. "They are spread out so it's difficult to arrest them," said an Iraqi source. "When there is an operation they are brought to collection areas — either mosques or a training camp." Messages are passed by word of mouth.

Jaish Mohammed is the most dangerous of Iraq's diverse elements of resistance and its presence is increasingly potent.

On Thursday in the Karadeh area of Baghdad an American Humvee pulled up as it did daily on the main street, where the soldiers bought cold drinks. At 2.15pm, a remote-controlled bomb buried in a dirt square exploded, seriously injuring two soldiers and killing two Iraqis.

Foreign fighters were also suspected of organising Thursday's truck bomb attack on the Jordanian embassy in Baghdad, which killed 19 people.

Yesterday America's top military officer said the continued incursion of foreign fighters into Iraq could lead to a diplomatic showdown between America and Iraq's neighbours.

"It's a serious issue," said General Richard Myers, chairman of the US joint chiefs of staff. "We have to convince these countries surrounding Iraq that it is not a good idea to allow foreign fighters in."

The Americans confirm they believe Al-Qaeda is operating in Iraq. Paul Bremer, the civilian administrator, said the military had found strong links between Al-Qaeda, other Iraqi groups and guerrilla attacks that have killed 55 US soldiers since Bush declared major combat operations over on May 1.

As the disturbances spread in Basra, British troops in riot gear struggled to control mobs burning tyres and attacking cars.

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