President Bush had rejected an earlier version of the legislation because he said it would expose the Iraqi government to expensive lawsuits.

The new bill, which the House passed by a vote of 369-46, would let Bush grant Iraq immunity under the provision, which otherwise guarantees that U.S. victims of state-sponsored abuse can sue foreign governments in court. Iraqi officials objected to the measure because they said it would have subjected Baghdad to high-dollar payouts in damages from the Saddam Hussein era.

The revised measure also makes the 3.5 percent pay increase for troops, included in the original bill, retroactive to Jan. 1.

The decision to change the bill without attempting to challenge Bush's rejection reflects the difficulty Democrats have had in challenging the president on even minor issues. Democrats lack the two-thirds majority needed to override a presidential veto.

Overall, the bill authorizes about $696 billion in defense spending, including $189 billion for the wars in Iraq and Afghanistan. Besides the pay raises for service members, the bill's primary purpose is to guide Pentagon policy, including setting restrictions on the Pentagon's multibillion-dollar acquisition program.

Sen. Frank Lautenberg, D-N.J., had sponsored the lawsuits provision, which he said was necessary to provide justice to American victims of terror. Republicans had embraced the legislation, and the bill passed by overwhelming margins in both chambers.

A few weeks later, after Iraqi officials objected, Bush announced his opposition.

In a statement, Bush said the legislation "would imperil billions of dollars of Iraqi assets at a crucial juncture in that nation's reconstruction efforts."

The revised bill allows Bush to waive the provision with regard to Iraq, so long as he determines that doing so promotes Iraqi reconstruction and that Baghdad remains a "reliable ally" in the war on terror.