Ignoring a presidential veto threat, the Democratic-controlled Senate on Thursday overwhelmingly approved a massive, $662 billion defense bill that would require the military to hold suspected terrorists linked to Al Qaeda or its affiliates, even those captured on U.S. soil.

The vote was 93-7 for the bill authorizing money for military personnel, weapons systems, national security programs in the Energy Department, and the wars in Iraq and Afghanistan in the fiscal year that began Oct. 1. Reflecting a period of austerity and a winding down of decade-old conflicts, the bill is $27 billion less than what President Barack Obama requested and $43 billion less than what Congress gave the Pentagon this year.

Shortly before final passage, the Senate unanimously backed crippling sanctions on Iran as fears about Tehran developing a nuclear weapon outweighed concerns about driving up oil prices that would hit economically strapped Americans at the gas pump. The vote was 100-0.

The Senate's version of the defense bill still must be reconciled with the House-passed measure in the final weeks of the congressional session.

In an escalating fight with the White House, the bill would ramp up the role of the military in handling terror suspects. Defense Secretary Leon Panetta and FBI Director Robert Mueller both oppose the provisions as does the White House, which said it cannot accept any legislation that "challenges or constrains the president's authorities to collect intelligence, incapacitate dangerous terrorists and protect the nation."

Late Thursday, a White House official said the veto threat still stands.

The bill would require military custody of a suspect deemed to be a member of Al Qaeda or its affiliates and involved in plotting or committing attacks on the United States. American citizens would be exempt. The bill does allow the executive branch to waive the authority based on national security and hold a suspect in civilian custody.

The legislation also would give the government the authority to have the military hold an individual suspected of terrorism indefinitely, without a trial. Senate Intelligence Committee Chairman Dianne Feinstein, D-Calif., had sought an exception to the provision for U.S. citizens. Lengthy negotiations produced a face-saving move that the Senate backed 99-1, a measure that said nothing in the bill changes current law relating to the detention of U.S. citizens and legal aliens.

Senate Armed Services Committee Chairman Carl Levin, D-Mich., repeatedly pointed out that the June 2004 Supreme Court decision in Hamdi v. Rumsfeld said U.S. citizens can be detained indefinitely.

The series of detention provisions challenges citizens' rights under the Constitution, tests the boundaries of executive and legislative branch authority and sets up a showdown with the Democratic commander in chief. Civil rights groups fiercely oppose the bill.

"Since the bill puts military detention authority on steroids and makes it permanent, American citizens and others are at greater risk of being locked away by the military without charge or trial if this bill becomes law," said Christopher Anders, senior legislative counsel for the American Civil Liberties Union.

The bill reflects the politically charged dispute over whether to treat suspected terrorists as prisoners of war or criminals. The administration insists that the military, law enforcement and intelligence agents need flexibility in prosecuting the war on terror after they've succeeded in killing Usama bin Laden and Anwar al-Awlaki. Republicans counter that their efforts are necessary to respond to an evolving, post-Sept. 11 threat, and that Obama has failed to produce a consistent policy on handling terror suspects.

The Senate rejected an effort by Feinstein to limit a military custody requirement for suspects to those captured outside the United States. The vote was 55-45. Feinstein said her goal was to ensure "the military won't be roaming our streets looking for suspected terrorists."

The issue divided Democrats, with nine senators, many facing re-election next year, breaking with their leadership and administration to vote against the amendment. Republicans held firm, with only Sens. Rand Paul of Kentucky, Mark Kirk of Illinois and Mike Lee of Utah backing Feinstein's effort.

"We need the authority to hold those individuals in military custody so we aren't reading them Miranda rights," Sen. Kelly Ayotte, R-N.H., said in defense of the legislation.

Last week, the administration announced a new set of penalties against Iran, including identifying for the first time Iran's entire banking sector as a "primary money laundering concern." This requires increased monitoring by U.S. banks to ensure that they and their foreign affiliates avoid dealing with Iranian financial institutions.

But lawmakers pressed ahead with even tougher penalties despite reservations by the administration.

Sens. Bob Menendez, D-N.J., and Kirk had widespread bipartisan support for their amendment that would target foreign financial institutions that do business with the Central Bank of Iran, barring them from opening or maintaining correspondent operations in the United States. It would apply to foreign central banks only for transactions that involve the sale or purchase of petroleum or petroleum products.

The sanctions on petroleum would only apply if the president determines there is a sufficient alternative supply and if the country with jurisdiction over the financial institution has not significantly reduced its purchases of Iranian oil.

Testifying before the Senate Foreign Relations Committee, David Cohen, a senior Treasury Department official, and Wendy Sherman, an undersecretary of state, warned that the amendment could force up oil prices -- a financial boon for Iran.

"There is absolutely a risk that in fact the price of oil would go up, which would mean that Iran would in fact have more money to fuel its nuclear ambitions, not less," Sherman said. "And our real objective here is to cut off the economic means that Iran has for its nuclear program."

Cohen said the amendment would tell foreign banks and companies "that if they continue to process oil transactions with the Central Bank of Iran their access to the United States can be terminated."

"It is a very, very powerful threat," Cohen warned. "It is a threat for the commercial banks to end their ability to transact in the dollar and their ability really to function as major international financial institutions," and one that could push allies away from contributing to a coordinated effort against Iran.