WASHINGTON - The situation in Iraq is "even worse than we thought," with key Iraqi leaders showing no willingness to compromise to avoid increasing violence, said Leon Panetta, a member of the high-powered advisory group that will recommend new options for the war.

The Iraq Study Group, including Panetta, plans to meet with President Bush and his national security team Monday at the White House, and gather more data on the war through briefings and interviews this week. Panetta was chief of staff in the Clinton White House.

The blue-ribbon group, headed by former Secretary of State James Baker and ex-Rep. Lee Hamilton of Indiana, plans to make recommendations to the Bush administration and Congress next month on new ways to handle the war. Members said they wanted to wait until after the election, to remove a debate about Iraq from campaign pressures.

After the election, their influence grew and their job became more urgent.

Fueled by discontent over the war, the Democrats scored a sweeping victory, retaking the House and the Senate. U.S. casualties have mounted in recent weeks. Bush signaled new flexibility on Iraq last week by replacing Secretary of Defense Donald Rumsfeld with former CIA chief Robert Gates - a member of the Iraq Study Group before accepting his new job.

Many officials in Washington hope that this group of insiders will offer a way out of Iraq, and give some political cover to Bush and a Democratic Congress.

"This week, the pressure on us just went up a few hundred degrees," Panetta said Friday. He is a former Democratic congressman who heads the Panetta Institute at California State University-Monterey Bay.

Panetta would not discuss the options the group is considering, noting that members have not reached a consensus yet, but talked about what he has learned about Iraq. The group spent three days in Baghdad in early September and has been briefed by military, intelligence and diplomatic officials.

Private assessments by government officials are much more grim than what is said in public, Panetta said, "and we left some of those sessions shaking our heads over how bad it is in Iraq."

U.S. forces can't control sectarian violence and powerful militias. One of the most disturbing findings, Panetta said, is that many Shiite religious leaders who are a big part of the government have no interest in deals or compromises with Sunnis and other groups, and are "playing for time because they say it's their show."

After years of Bush administration rhetoric about establishing democracy in Iraq, Panetta said the only achievable goal is a rough stability, "which can't be done by the military. It requires political reconciliation."

One scaled-down goal, he added, is "how do you maintain a low-level civil war so it doesn't blow up into a full-scale civil war?"

The Iraq group is looking at an array of options, including a phased withdrawal of U.S. forces, an accelerated training of Iraqi forces, and diplomatic efforts to involve Iraq's neighbors, according to several media accounts.

Some congressional leaders and retired generals criticized Rumsfeld for arrogance and an inability to admit mistakes and make adjustments in Iraq. Gates will be different, Panetta said.

"He's an old-school pragmatist, like Baker and Brent Scowcroft," Panetta said. "He's flexible and wants to get the job done. He always asked incisive questions, and knows what went wrong in Iraq."

Gates expressed his frustration with the administration's Iraq policy during a visit last year to the Bay Area.

He shared the stage with former Clinton administration national security adviser Samuel "Sandy" Berger at a May 2005 lecture at the Panetta Institute.

Both men expressed surprise that resentment of U.S. foreign policy in Iraq and elsewhere had not resulted in suicide bomb attacks inside the United States.

"I too am puzzled by the fact that there haven't been suicide bombers," Gates said. "That's not an invitation, just an observation. We should count ourselves very fortunate."

Berger and Gates both were critical of the intelligence apparatus that allowed President Bush to receive false information concluding that Saddam Hussein had weapons of mass destruction.

"Fundamentally, it was just a lousy piece of work," Gates said.

The key to a new policy on Iraq, Panetta said, is whether Bush will be flexible, and whether Democratic leaders in Congress will try to work with a president who said during the campaign that voting for Democrats would help terrorists.

"Both sides have been in trench warfare for months, and the real question is whether they will be able to put down their grenades and bayonets and pick up the tools you need to get something done," he said.

The seismic shift in power this week reminded Panetta of 1994, when he was in the Clinton White House, rocked by the rejection of voters and the loss of Congress to the GOP.

"We were in a state of shock for days, and then we adjusted," he said. "You can actually get things done in a divided government."

The Democrats' big victory Tuesday also reminded Panetta of voter discontent in California during the 2003 recall election: "Voters were angry over gridlock, extreme partisanship, the failure to deal with crises - and they took it out on the party in power."

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© 2006, San Jose Mercury News (San Jose, Calif.).

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Distributed by McClatchy-Tribune Information Services.
San Jose Mercury News correspondent Ken McLaughlin contributed to this report.

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