By James Glanz, New York Times News Service  |  October 18, 2007

BAGHDAD - Iraq has agreed to award $1.1 billion in contracts to Iranian and Chinese companies to build a pair of enormous power plants, the Iraqi electricity minister said yesterday. Word of the project prompted serious concerns among American military officials, who fear that Iranian commercial investments can mask military activities at a time of heightened tension with Iran.

The Iraqi electricity minister, Karim Wahid, said that the Iranian project would be built in Sadr City, a Shi'ite enclave in Baghdad that is controlled by followers of the anti-American cleric Moqtada al-Sadr. He added Iran had also agreed to provide cheap electricity from its own grid to southern Iraq, and to build a large power plant essentially free of charge in an area between the two southern Shi'ite holy cities of Karbala and Najaf.

The expansion of ties between Iraq and Iran occurs as the United States and Iran clash on nuclear issues and about what American officials have repeatedly said is Iranian support for armed groups in Iraq. American officials have charged that Iranians, through the international military wing known as the Quds Force, are particularly active in support of elite elements of the Mahdi Army, a militia largely controlled by Sadr.

An American military official in Baghdad said that while he had no specific knowledge of the power plant contracts, any expansion of Iranian interests was a concern.

"We are of course carefully watching Iran's overall presence here in Iraq," the military official said. "As you know, it's not always as it appears. Their Quds Force routinely uses the cover of a business to mask their real purpose as an intelligence operative."

At the same time, it is possible to view Iranian and Chinese investment as giving those countries a stake in Iraqi stability. The power plants could also boost a troubled reconstruction effort in Iraq. A US Embassy spokesman said, "We welcome any efforts to help develop Iraq's energy infrastructure."

"These proposals reflect the ongoing business opportunities that are arising in Iraq that American firms should be competing for," said the spokesman, who asked not to be named.

It was unclear whether any American firms had tried to win the work, although Wahid said the projects had been submitted for bids. The embassy spokesman said, "We are unaware of any violations of principles of open and fair bidding."

The agreements between Iraq and Iran come after the American-led reconstruction effort, which relied heavily on large American contractors, has spent nearly $5 billion of US taxpayer money on Iraq's electricity grid.