CRAWFORD, Texas (CNN) -- President Bush on Friday rejected the defense spending bill passed by Congress earlier this month.

With a "pocket veto," President Bush has killed a defense spending bill passed by Congress earlier this month.

The president has concerns over a provision that would let victims of Saddam Hussein's regime with legal claims in U.S. courts seek compensation from the Iraqi government.

He issued a "memorandum of disapproval" Friday that means the bill will die without becoming law.

He did not veto it outright, but killed the bill by failing to sign it within 10 days of Congress passing it.

When that happens and Congress is out of session, a bill dies without becoming law -- a process known as a "pocket veto."

If enacted, the White House said, the act would have permitted "plaintiff's lawyers immediately to freeze Iraqi funds and would expose Iraq to massive liability in lawsuits concerning the misdeeds of the Saddam Hussein regime.

"The new democratic government of Iraq, during this crucial period of reconstruction, cannot afford to have its funds entangled in such lawsuits in the United States."

Among those who would have benefited from the provision are American prisoners of war from the 1991 Gulf War who were tortured and beaten by members of Hussein's military.

The Gulf War POWs sought $959 million in compensation from the interim Iraqi government. They were opposed by the Bush administration, which argued Iraq has reformed and needs the money to rebuild.

The Supreme Court without comment refused in 2005 to intervene in the dispute, following a federal appeals court ruling that said Congress did not permit such lawsuits against foreign governments.

The suit was brought by 17 former POWs and their family members.

The pocket veto also blocks a 0.5 percent pay raise for members of the U.S. armed forces, but does not affect a 3 percent pay increase scheduled to take effect Tuesday.

The White House, however, said it hopes to reinstate the 0.5 percent pay raise, retroactive to Jan. 1, after working with Congress to remove the provision related to legal claims against Iraq.

Bush's action Friday also blocks more money for veterans' health care.

House Speaker Nancy Pelosi, D-California, and Senate Majority Leader Harry Reid, D-Nevada, criticized the president's decision.

"The defense bill passed both houses of Congress by overwhelming bipartisan margins and addresses urgent national security priorities," including the pay raise and money for veterans' health care, Pelosi and Reid said in a written statement. "It is unfortunate that the president will not sign this critical legislation."

The chairman of the Senate Armed Services Committee, Sen. Carl Levin, D-Michigan, also expressed dismay at the president's decision.

"This bill is important to our men and women in uniform," Levin said. "It is unfortunate that the administration failed to identify the concerns upon which this veto is based until after the bill had passed both houses of Congress and was sent to the president for signature.

"I am deeply disappointed that our troops and veterans may have to pay for their mistake and for the confusion and uncertainty caused by their snafu."

The disputed legal claims provision in the defense bill prompted the Iraqi government to threaten to withdraw $25 billion in Iraqi assets from U.S. banks, White House officials told CNN.

The Democratic leaders said that Bush worked closely with Congress on the bill and "gave no indication prior to its passage that one section of the bill could generate a presidential veto." E-mail to a friend

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