BAGHDAD, Iraq, July 27 — The United States is dropping Bechtel, the American construction giant, from a project to build a high-tech children's hospital in the southern Iraqi city of Basra after the project fell nearly a year behind schedule and exceeded its expected cost by as much as 150 percent.

Called the Basra Children's Hospital, the project has been consistently championed by the first lady, Laura Bush, and Secretary of State Condoleezza Rice, and was designed to house sophisticated equipment for treating childhood cancer.

Now it becomes the latest in a series of American taxpayer-financed health projects in Iraq to face overruns, delays and cancellations. Earlier this year, the Army Corps of Engineers canceled more than $300 million in contracts held by Parsons, another American contractor, to build and refurbish hospitals and clinics across Iraq.

American and Iraqi government officials described the move to drop Bechtel in interviews on Thursday, and Ammar al-Saffar, a deputy health minister in Baghdad, allowed a reporter to take notes on briefing papers on the subject he said he had recently been given by the State Department.

The United States will "disengage Bechtel and transfer program and project management" to the Army Corps of Engineers, the papers say. Bechtel, the State Department agency in charge of the work and the Health Department in Basra all confirmed that the company would be leaving the project, but the reasons are a matter of deep disagreement.

The Iraqis assert that management blunders by the company have caused the project to teeter on the verge of collapse; the American government says Bechtel did the best it could as it faced everything from worsening security to difficult soil conditions.

A senior company official said Thursday that for its part Bechtel recommended that the work be mothballed and in essence volunteered to leave the project because the security problems had become intolerable. He also disputed the American government's calculation of cost overruns, saying that accounting rules had recently been changed in a way that inflated the figures.

The official, Cliff Mumm, who is president of the Bechtel infrastructure division, predicted that the project would fail if the government pressed ahead, as the briefing papers indicate that it would. Because of the rise of sectarian militias in southern Iraq, Mr. Mumm said, "it is not a good use of the government's money" to try to finish the project.

"And we do not think it can be finished," he said.

Beyond the consequences for health care in southern Iraq, abandoning the project could be tricky politically because of the high-profile support from Mrs. Bush and Ms Rice. Congress allocated $50 million to the Basra Children's Hospital in late 2003 as part of an $18.4 billion reconstruction package for Iraq. Now the government estimates that the cost overruns are so great that the project will cost as much as $120 million to complete and will not be finished before September 2007, nearly a year later than planned. Some other estimates put the overruns even higher. Kadhim Hassan, general director of the Basra Health Department, said the project would be no more than 40 percent complete once the original $50 million, much of which is going to subcontractors, had been used up. He said little work had been done for months.

While Bechtel pointed to security problems in delaying the project and increasing its cost, the Iraqis generally rejected that view.

"The pretexts given by Bechtel to the Iraqi government to justify its failure in finishing the project are untrue and unacceptable, especially the ones regarding the rise in security expenses," said Sheik Abu Salam al-Saedi, a member of the Basra provincial council.

Western engineers were seldom seen at the project, Mr. Saedi said, adding that it was simply mismanaged. Mr. Saffar, of the Health Ministry in Baghdad, and an Iraqi contractor in Basra both asserted that Bechtel's use of a complicated chain of subcontractors was part of the problem.

Bechtel hired a Jordanian company, for example, to oversee work by local Iraqi construction companies. The American government wasted money by going through such a complex chain of companies rather than working directly with the Iraqis who would do the work anyway, Mr. Saffar said.

"Our counterparts should have full faith in the Iraqi companies," Mr. Saffar said.

That kind of turmoil was far from the minds of planners and supporters when the hospital project was conceived and promoted. Mrs. Bush and Ms. Rice were unwavering supporters, and Project HOPE, a charitable organization, planned to provide at least $50 million in medical equipment.

In a gala for Project HOPE last October, Mrs. Bush praised the project, describing its plan for 94 beds, a state-of-the-art neonatal unit, a linear particle accelerator for radiation therapy and CAT scanners. Ms. Rice added that the hospital "will make a real difference, a life-saving and lasting difference, to the thousands of children and their families."

But like so many other reconstruction projects in Iraq, the hospital was blindsided by changing realities on the ground. Once considered a relatively tranquil section of Iraq, the south has become increasingly dangerous with the rise of Shiite militias in the past two years — so much so, said Mr. Mumm, the Bechtel official, that construction was often forced to shut down.

With those delays came increasing costs as the company absorbed the expenses of housing, feeding and protecting its work force while the work sat idle, Mr. Mumm said. One consequence was that the nonconstruction costs usually referred to as overhead or administrative costs skyrocketed.

Bechtel estimated that as much as 50 percent of its expenses on the project were overhead costs, which were paid with American money separate from the $50 million construction contract.

David Snider, a spokesman for the United States Agency for International Development, the State Department agency in charge of the project, said that technically, Bechtel's contract was not being terminated because the contract did not actually require the company to complete the hospital.

"They are under a ‘term contract,' which means their job is over when their money ends," Mr. Snider said. So despite not finishing the hospital, he said, "they did complete the contract."

A confidential report commissioned by the development agency criticizes it for failing to properly account for all of the costs of building a functioning hospital. The agency is likely to face further criticism as it seeks additional money to complete the hospital as part of an Iraq reconstruction program that has increasingly come to be seen as overpriced and ineffective.

The State Department briefing papers describing problems with the hospital project say the United States has been approached by Spain with a potential offer to donate some of the money needed to finish it. If that money is not forthcoming, the papers say, the United States will shift funds now allocated to the crucial oil infrastructure reconstruction to complete the hospital.

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