President George W. Bush intends to veto defense authorization legislation over a provision that would imperil Iraqi assets held in the United States, the White House said on Friday.

The White House said it was concerned about a provision that would allow a freezing of Iraqi assets for lawsuits brought by Americans against Iraq over activities under Saddam Hussein's leadership, which could tie up Iraqi assets needed for the country's reconstruction.

It would allow plaintiffs' lawyers immediately to freeze Iraqi funds and would expose Iraq to massive liability in lawsuits concerning the misdeeds of the Saddam Hussein regime, White House spokesman Scott Stanzel said.

The veto would not interrupt funding for the Pentagon and Iraq war since separate legislation provides more than $500 billion for this fiscal year.

Congressional Democratic leaders House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid criticized the expected veto and said the administration should have raised its objections earlier in the legislative process.

It is unfortunate that the president will not sign this critical legislation, they said in a statement. Instead, we understand that the president is bowing to the demands of the Iraqi government, which is threatening to withdraw billions of dollars invested in U.S. banks if this bill is signed.

The White House was consulting congressional leadership over the need to modify the bill, Stanzel said.

The new democratic government of Iraq, during this crucial period of reconstruction, cannot afford to have its funds entangled in such lawsuits in the United States, he said.

The defense policy bill also authorizes a pay raise for U.S. troops, expands the size of the U.S. Army and sets conditions on the Bush administration's plan to build a missile defense system in Europe.

The bill lays out a road map of military priorities, and directs weapons acquisition programs.

(Reporting by Tabassum Zakaria; Editing by Doina Chiacu)