"Syria is by far the country in the region that has been hardest hit by the military operation in Iraq," said Richard Brun, a French expert who spent several years in Damascus studying the country's economy.

Washington has stepped up the rhetoric against Syria in recent days, accusing it of harboring weapons of mass destruction, testing chemical weapons and providing safe haven to fugitive officials fleeing Iraq.

While US military action against Damascus seems unlikely as Washington begins the difficult task of rebuilding postwar Iraq, the threat of diplomatic and economic sanctions is worrying as Syria struggles to modernize its economy.

Paris-based diplomats from Arab states said the sanctions could come via a resurrection of the "Syria Accountability Act", draft US legislation defeated last year that called for a series of economic measures against Damascus.

The original draft sought to punish Syria -- which is on the US State Department's list of state sponsors of terrorism -- for supporting the Lebanon-based Shiite militia group Hezbollah and the Islamic Jihad.

Eventual US sanctions would not have a direct negative effect on Syria's economy, experts say, as the United States -- unlike the European Union or Turkey -- is not one of the country's significant trading partners.

But such a punishment would come in trying times as Syria reels from a massive drop in its oil sales due to the loss of trade with Iraq, and the add-on effect of US sanctions could exacerbate the tenuous economic situation.

"As opposed to other Gulf states and even Iran, which have started to modernize their economies, Syria is still a Socialist-type country," Brun said.

"It has not yet put in place a modern financial system, it has a public sector with colossal deficits, unemployment is at about 25 percent and is particularly bad among young people," he explained.

Brun explained that since the reopening of a key oil pipeline in November 2000, Syria received 200,000 barrels per day (bpd) of crude from Iraq at 14 dollars a barrel, about half the going rate on world oil markets on Tuesday.

Much of that oil was not exported, but refined and consumed in Syria, so that Damascus could boost exports of its own oil, according to industry media reports.

Syria currently produces 600,000 barrels per day, of which it consumes 300,000-350,000 bpd.

But since the start of the US-led war in Iraq on March 20, and the simultaneous end to the UN oil-for-food program, Syria's profitable trade in Iraqi oil and exports of other goods to Baghdad has trickled to a halt.

According to the Energy Intelligence Group (EIG), Syria told its oil clients earlier this month to be prepared for a sharp drop in its sales of crude, an indication that its imports from neighboring Iraq had ended.

The decrease in Syrian oil exports -- which EIG said could be as high as 40 percent for 2003 -- along with sagging oil prices would devastate the country's economy, which depends on oil production for most of its fiscal and external revenue.

To its credit, Syria has significant currency reserves, nearly non-existent debt and a trade surplus.

In 2002, the Syrian economy grew by 3.35 percent, in line with the government's five-year economic plan for 2001-2005, the government announced in January.

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