The Yugoslav government said it had formed a committee to investigate the allegations that import-export company Jugoimport had been involved in a sale of weapons by Bosnian Serb firm, Orao to Baghdad.

The government said the defence ministry would also be probed along with the company, while Serbian police and justice officials have already launched a full-scale investigation.

And Yugoslav President Vojislav Kostunica said he had consulted state and military prosecutors over the case, before informing US ambassador to Belgrade, William Montgomery of the "measures taken so far," Tanjug news agency reported.

"We have done all we can and the investigation of all elements of this case is continuing," Kostunica said.

A senior official in the Yugoslav government, who did not want to be named, indicated that acting Yugoslav army chief General Branko Krga would be called upon to provide information.

Kostunica also said the Jugoimport's involvement was a "hazardous and irresponsible business move."

But he insisted that the firm's involvement was "eventually reduced to a repair of old-fashioned aircraft engines."

"We should not tendentiously present a hazardous and irresponsible business move... as a political choice," Kostunica told Tanjug.

He insisted that official Belgrade has only been involved in UN Oil for food programme with Iraq, "selling wheat, medecine and vaccines" to Iraq.

Earlier, Yugoslav Interior Minister Zoran Zivkovic said the unspecified "confirmation" had been found to support the US allegations, and warned of the possible repercussions if Belgrade failed to act.

"Just a suspicion that something has been done with Iraq, which is under sanctions, is reason enough to jeopardise top state interests," he said.

The government has already ordered the sacking of Ivan Djokic, assistant to Yugoslav defence minister in charge of military exports, and Jugoimport chairman Jovan Cekovic.

Jugoimport was also ordered to close its office in Baghdad, and its managing board said in a statement it had already instructed.

Serbian Prime Minister Zoran Djindjic said in a speech Wednesday that the scandal was "just another sign" that the Yugoslav army was not under civilian control two years after the fall of former president Slobodan Milosevic.

Kostunica "should deal with the implementation of that law and it is bad that he hasn't done so," he said.

Kostunica is Djindjic's main rival for power in Serbia, the largest Yugoslav republic.

The Yugoslav president is also chairman of the Supreme Defense Council, the top civilian body in charge of the military.

"At a time when the world is polarizing into countries that fight against terrorism and states that support terrorism it is very bad to be put in the last group in any way," Djindjic said.

Serbian Deputy Prime Minister Nebojsa Covic said the allegations were a matter of urgency for Belgrade but denied any government involvement.

"The state has to react quickly and show that this has nothing to do with the state but it is a legacy of the past," he told B92 radio.

Belgrade press reported that a former Milosevic's trade minister, Borisav Vukovic, has been involved in the suspected trade.

In Washington, State Department spokesman Richard Boucher said Tuesday that the US was awaiting responses from Sarajevo and Belgrade before deciding on possible punishing measures.

But Boucher added that the United States did not have evidence that either the Bosnian or Yugoslav federal governments played any role in the sales.

Earlier this month, the Yugoslav army denied reports that Yugoslav radar and weapons systems experts were helping Iraqi air defences ahead of an anticipated US attacks over Baghdad's alleged weapons of mass destruction.

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