Fallujah, Iraq ? U.S.-funded reconstruction in a one-time Sunni insurgent stronghold has been suspended because of a corruption probe, including allegations that the mayor and police chief were involved in a multimillion-dollar oil smuggling ring, The Associated Press has learned.

The problems in Hit, a dusty, ramshackle western town along the Euphrates River, provide a glimpse of the challenges in rebuilding a country where years of war and misrule have destroyed the social fabric.

Reconstruction is a key part of the U.S. military strategy against both Sunni and Shiite extremists, but many projects have long been dogged by mismanagement and allegations of corruption.

The U.S. government suspended its efforts in Hit this month after the police chief, Col. Salah Rasheed al-Gaoud, was fired for his alleged role in the scheme, U.S. and Iraqi officials familiar with the investigation told the AP.

Officials also confirmed that the mayor, Hikmat Jubair al-Gaoud, was under investigation. Marine Lt. Col. Chris Hughes, a spokesman for U.S. forces in Anbar province, said the mayor’s current whereabouts were unknown and that it was unclear whether he fled the country.

But a man identifying himself as the mayor told the AP when contacted on al-Gaoud’s mobile phone that he was still in Hit and “still in my job as the mayor.”

“There is a committee that it is investigating the case of stealing oil and its work has not finished yet,” he said Thursday.

Among the reconstruction projects that have been suspended are repairs to the town’s dilapidated infrastructure, including street repairs, sewerage upgrade and school construction.

U.S. military officials said reconstruction projects in Hit would remain on hold during the investigation, which Iraqis said was being conducted by the Ministry of Interior.

“Since the mayor and the chief of police are under investigation for corruption, we have stopped all reconstruction efforts in Hit until the investigation is resolved,” said Mike Isho, the Arabic public affairs officer for Multi-National Forces-West.

“Since there is nobody to lead the city, it doesn’t make a whole lot of sense to continue these projects,” Isho said. Caught in the middle are the 120,000 residents of Hit, located in Anbar province 85 miles west of Baghdad.

Although the U.S. has been trying to pursue reconstruction projects in Iraq since the early months of the war, the effort has taken on greater urgency since Gen. David Petraeus assumed command of the U.S. mission in late 2006.

Once U.S. and Iraqi troops subdue militants in a town or district, the next step is to begin programs to improve the quality of life to undermine support for the militants among the civilian population.

Last month, however, Democratic Sens. Bryon Dorgan of North Dakota and Sheldon Whitehouse of Rhode Island asked the Treasury Department to investigate whether Iraqi officials have embezzled or misspent billions of U.S. tax dollars intended for the country’s reconstruction. Both senators called the scope of corruption within the Iraqi government staggering.

Such allegations have not been limited to the Iraqis. The Pentagon’s inspector general reported last month that an internal audit of about $8 billion paid to U.S. and Iraqi contractors found that nearly every transaction failed to comply with U.S. laws or regulations aimed at preventing fraud.

Those findings provide fresh fodder for anti-war Democrats, who say the Bush administration has turned a blind eye to the problem of corruption and fraud by relying too heavily on contractors to manage the war.