Halliburton, the firm once run by Vice President Dick Cheney, said it believed a "politically charged environment" and leaks to media led to the decision.

The Army Materiel Command told Halliburton on Tuesday that it had decided to implement a clause that allows the Pentagon to keep back 15 percent of invoice payments.

The action relates to future invoices under a contract known as LOGCAP III, awarded to Halliburton subsidiary KBR in 2001, to deliver combat support and services to the US military throughout the world.

KBR has so far been awarded more than 4.2 billion dollars in work under the contract.

Halliburton said the Pentagon's decision would be mitigated because it intended to withhold 15 percent from its own subcontractors in accordance with the deals it has signed with them.

Only on Monday, Halliburton had said it expected to Pentagon not to implement the 15-percent withholding clause.

The statements Monday "were accurate at the time based on clear oral assurances from senior Pentagon representatives," it said.

"Halliburton also believes that a politically charged environment and leaks to news media have likely contributed to yesterday's events (the decision to withhold part of the contract payments)."

Cheney was chief executive of Halliburton from 1995 to 2000.

An internal Pentagon audit, released last week, faulted Halliburton for failing to account for some of the money it spent under the contract and warned it might start withholding payments.

The audit, concluded August 4, highlighted a series of problems in KBR's accounting system related to the costs of providing food, shelter and other support to American troops in Iraq and Kuwait.

KBR gave the military "inadequate cost estimate development, (and) incomplete and inadequate management review of cost estimates" among other problems, the audit found.

The Pentagon has given Halliburton 45 days to come up with a new accounting plan.

"At the end of the day, we do not expect this will have a significant or sustained impact on liquidity," said Halliburton chief financial officer Cris Gaut.

"There are very few companies in the world that could or would adapt this quickly while, at the same time, financing an operation of this magnitude," he said.

The LOGCAP III contract had a base period of one year with up to nine one-year options.

Halliburton said it would ask a judge to determine that the 15 percent payment cut does not apply to contracts such as LOCCAP and the Rebuild Iraqi Oil I and II contracts with the Army Corps of Engineers.

The company said it expected its stance to be upheld in litigation.

WAR.WIRE