U.S.-funded reconstruction in a one-time Sunni insurgent stronghold has been suspended because of a corruption probe, including allegations that the mayor and police chief were involved in a multimillion-dollar oil smuggling ring, The Associated Press has learned. The problems in Hit, a dusty, ramshackle western town along the Euphrates River, provide a glimpse of the challenges in rebuilding a country where years of war and misrule have destroyed the social fabric. Reconstruction is a key part of the U.S. military strategy against both Sunni and Shiite extremists, but many projects have long been dogged by mismanagement and allegations of corruption.

The U.S. government suspended its efforts in Hit this month after the police chief, Col. Salah Rasheed al-Gaoud, was fired for his alleged role in the scheme, U.S. and Iraq (web|news) i officials familiar with the investigation told the AP.

Officials also confirmed that the mayor, Hikmat Jubair al-Gaoud, was under investigation. Marine Lt. Col. Chris Hughes, a spokesman for U.S. forces in Anbar province, said the mayor's current whereabouts were unknown and that it was unclear whether he fled the country.

But a man identifying himself as the mayor told the AP when contacted on al-Gaoud's mobile phone that he was still in Hit and "still in my job as the mayor."

"There is a committee that it is investigating the case of stealing oil and its work has not finished yet," he said Thursday.

Among the reconstruction projects that have been suspended are repairs to the town's dilapidated infrastructure, including street repairs, sewerage upgrade and school construction.

U.S. military officials said reconstruction projects in Hit would remain on hold during the investigation, which Iraqis said was being conducted by the Ministry of Interior.

"Since the mayor and the chief of police are under investigation for corruption, we have stopped all reconstruction efforts in Hit until the investigation is resolved," said Mike Isho, the Arabic public affairs officer for Multi-National Forces-West.

"Since there is nobody to lead the city, it doesn't make a whole lot of sense to continue these projects," Isho said. Caught in the middle are the 120,000 residents of Hit, located in Anbar province 85 miles west of Baghdad.

Although the U.S. has been trying to pursue reconstruction projects in Iraq since the early months of the war, the effort has taken on greater urgency since Gen. David Petraeus (news |bio) assumed command of the U.S. mission in late 2006.

Once U.S. and Iraqi troops subdue militants in a town or district, the next step is to begin programs to improve the quality of life to undermine support for the militants among the civilian population.

Last month, however, Democratic Sens. Bryon Dorgan of North Dakota and Sheldon Whitehouse of Rhode Island asked the Treasury Department to investigate whether Iraqi officials have embezzled or misspent billions of U.S. tax dollars intended for the country's reconstruction. Both senators called the scope of corruption within the Iraqi government staggering.

Such allegations have not been limited to the Iraqis. The Pentagon's inspector general reported last month that an internal audit of about $8 billion paid to U.S. and Iraqi contractors found that nearly every transaction failed to comply with U.S. laws or regulations aimed at preventing fraud.

Those findings provide fresh fodder for anti-war Democrats, who say the Bush administration has turned a blind eye to the problem of corruption and fraud by relying too heavily on contractors to manage the war.

The investigation in Hit began this year after allegations that al-Gaoud, the police chief, was involved in a scheme to divert oil illegally from a storage area at Kubaisa, about six miles southwest of the town.

Officials familiar with the probe said the police chief allegedly provided false papers authorizing tanker drivers to load fuel at Kubaisa. The fuel was then sold on the black market.

In April, al-Gaoud was forced out of his job. Officers from the Marine Corps' Regimental Combat Team 5, which helps train Iraqi security forces throughout Anbar, witnessed his resignation. Iraqi officials confirmed the account but spoke on condition of anonymity because the investigation is continuing.

Al-Gaoud's predecessor in the post, Col. Hamid Ibrahim al-Jazaa, was arrested by U.S. forces last year for allegedly freeing prisoners from the local jail in return for money. He is currently held at the U.S.-run Bucca prison in southern Iraq.

Most recently, the Anbar provincial council ordered the dismissal of the provincial police chief, Maj. Gen. Tariq Youssef Mohammed, for alleged misconduct. It was Mohammed who had ordered al-Gaoud to resign.

But Mohammed refused to give up his post because he was appointed by the Ministry of Interior in Baghdad, arguing that the council had no right to replace him.

Hughes said that although U.S. officials were not involved in the investigation of the mayor and police chief, they were keeping an eye on developments in the case.

"We're eager to plug back in though. Hopefully, this matter will soon be resolved," Hughes said.

The suspension of the reconstruction effort is the latest obstacle for U.S. forces in Hit.

The city was once believed to be a way station for weapons and insurgent fighters entering the country from Syria, 110 miles of rough road to the west.

In early 2004, the Marines took over responsibility for western Anbar but had to shift forces eastward when violence flared in the provincial capital of Ramadi and in Fallujah. With the remaining Marines overstretched, Hit fell back under the control of Sunni insurgents.

In February 2007, Iraqi police backed by U.S. troops swept through the city, arresting suspected insurgents, establishing new police stations in the downtown area and reasserting the government's authority.

Since then, corruption has not been Hit's only problem. Last month, a suicide bomber blew himself up at a police checkpoint. Only a police colonel was killed, but the attack was a reminder that stability remains uncertain.

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AP correspondents Sameer N. Yacoub and Bushra Juhi in Baghdad contributed to this report.