A directive from Deputy Defense Secretary Paul Wolfowitz limits bidders on those 26 contracts to firms from the United States, Iraq, their coalition partners and other countries which have sent troops to Iraq.
The ruling bars companies from U.S. allies such as France, Germany and Canada from bidding on the contracts because their governments opposed the American-led war that ousted Saddam Hussein's regime.
"If these comments are accurate ... it would be difficult for us to give further money for the reconstruction of Iraq," said Canada's deputy prime minister, John Manley. "To exclude Canadians just because they are Canadians would be unacceptable if they accept funds from Canadian taxpayers for the reconstruction of Iraq."
Steven Hogue, a spokesman for Prime Minister Jean Chretien, said Canada has contributed more than $190 million to the rebuilding effort.
In other recent developments:
The Wolfowitz memo, dated Friday and posted on a Pentagon web site Tuesday, says restricting contract bids "is necessary for the protection of the essential security interests of the United States."
CBS News Correspondent Elaine Cobbe reports France is studying the directive to see whether or not it breaks international laws on competition. It is conferring with the European Union and the European Commission.
The move is bound to anger France and the other countries at a time when Washington has been trying to court their goodwill for the cleanup effort.
Bush administration officials have suggested publicly and privately since before the war started that countries which opposed the United States on Iraq would be cut out of at least some of the lucrative rebuilding contracts administered by Washington. The order from Wolfowitz covers contracts to manage the entire rebuilding effort, train and equip the Iraqi National Army and rebuild infrastructure including roads, sewers, power plants and oil fields.
Wolfowitz wrote that the restrictions would encourage other countries to join the coalition in Iraq. A Pentagon spokesman, Maj. Joe Yoswa, said the order does not prohibit companies from the excluded countries from getting subcontracts in Iraq.
Meanwhile, the Pentagon's top general said Tuesday the U.S. military will not be vulnerable when four of the Army's ten divisions come home from Iraq to rest and retrain early next year.
Joint Chiefs of Staff Chairman Richard Myers also asserted the U.S. is "clearly" winning in Iraq.
Myers and Defense Secretary Donald H. Rumsfeld cautioned, however, that a recent decline in anti-coalition attacks in Iraq may be temporary.
"It's a bit early to call it a trend," Rumsfeld said, adding that he believes more attacks on American troops in Iraq are inevitable.
They spoke on a day when suicide bombers set off explosions at the gates of two U.S. military bases, injuring scores of American troops, most of them slightly. The coalition is increasingly able to thwart such attacks before they happen, Myers said.
"Our ability to gather intelligence and target specifically folks that are in the bomb-making business has gone up dramatically," Myers said. "We have had a real spike up in Iraqis coming forward to provide intelligence."
"This international coalition is not going to let ... the former regime elements that are fighting us win," Myers said. "We're going to win. That's it."
The defense secretary returned Sunday from a weeklong trip, which included stops in Iraq and Afghanistan. Rumsfeld and Myers said there are no plans to add to the 123,000 U.S. troops in Iraq or change the schedule for sending fresh troops in next year.
That troop rotation will involve most of the Army: Four of the Army's ten divisions will be going home from Iraq, replaced by three divisions. Another Army division will rotate into Afghanistan.
"In the next four months, we're going to pull off a logistics feat that will rival any in history," Myers said.
Would the United States be ready to fight another war during or after that transition?
"That's an unqualified yes," Myers said.
Still, the Pentagon will carefully manage the rotations to minimize the damage from replacing experienced troops, Rumsfeld said.
"The people going over are ready, but the people there are experienced and really know their stuff," Rumsfeld said. "There's going to have to be overlap. We're going to have to be sensitive to the fact that the knowledge that's built up there and the relationships have to be transferred."
Rumsfeld denied reports that Israeli experts were training American or Iraqi units to battle insurgents in Iraq. Myers said an American unit was working to capture Saddam and others of the 55 most-wanted Iraqis.