Washington ? President Bush will not support a war spending bill that punishes the Iraqi government for failing to meet benchmarks for progress, Secretary of State Condoleezza Rice said Sunday.

Rice’s comments cast fresh doubt on a potential compromise between the Democratic-led Congress and the White House in getting money to U.S. troops.

Also, with a regional conference on Iraq set to begin Thursday in Egypt, Rice raised the possibility of a rare direct encounter between high-level U.S. and Iranian officials. Foreign Minister Manouchehr Mottaki is expected to lead his country’s delegation.

“I will not rule out that we may encounter one another,” Rice said. “But what do we need to do? It’s quite obvious. Stop the flow of arms to foreign fighters. Stop the flow of foreign fighters across the borders.”

In Washington this week, Bush plans to veto a $124.2 billion war spending bill that includes a timeline for withdrawing U.S. forces from Iraq. In a second version, Democratic leaders may scrap the timetable but work with Republican lawmakers on benchmarks: ordering the Iraqi government to fulfill promises on allocating oil resources, amending its constitution and expanding democratic participation.

Rice said the president would not agree to a plan that penalizes Baghdad if the Iraqi government falls short. To do so, she said, would restrain the abilities of Gen. David Petraeus, the top U.S. military commander in Iraq, and Ryan Crocker, the new U.S. ambassador to Iraq.

“That’s the problem with having so-called consequences,” Rice said.

“To begin now to tie our own hands – and to say ‘We must do this if they don’t do that’ – doesn’t allow us the flexibility and creativity that we need to move this forward,” she said.

Benchmarks have emerged as a possible rallying point as U.S. leaders seek to show they are holding the Iraq government accountable. But establishing goals without consequences may seem pointless to many Democratic lawmakers, who want an aggressive change in policy.

“The benchmarks – the Iraqis agreed to it, the president agreed it,” said Rep. John Murtha, D-Pa., who heads a House subcommittee that controls defense spending. “We’re saying to them, well, let’s put some teeth into the benchmarks.”