Panel says Wolfowitz broke rules on girlfriend's salary

The panel said Mr Wolfowitz, one of the architects of the Iraq war, had produced a "crisis of leadership" at the bank. In a report released ahead of a meeting today of the bank's 24-strong board, the panel said he had broken the code of conduct and violated the terms of his contract.

Mr Wolfowitz, 62, secured a pay rise for his Oxford-educated partner Shaha Riza, 52, after he was appointed president of the World Bank in 2005.

She was transferred to the US State Department to avoid a conflict of interest but stayed on the bank's payroll. Her salary went from £98,162 to £132,851. With subsequent increases, it eventually rose to £142,881.

The panel concluded the salary increase Ms Riza received "at Mr Wolfowitz's direction was in excess of the range" allowed under bank rules.

The panel concluded: "The (board) must consider whether Mr Wolfowitz will be able to provide the leadership needed to ensure that the bank continues to operate to the fullest extent possible in achieving its mandate."

The report piles pressure on Mr Wolfowitz to resign. Critics say his conduct has undermined the bank's ability to demand greater transparency and better governance from the developing countries it supports.

But Mr Wolfowitz looked set to resist calls for his dismissal. Speaking ahead of the board hearing, he said of the panel's report: "It is highly unfair and unwarranted to now find that I engaged in a conflict of interest because I relied on the advice of the ethics committee as best I understood it."

He said in a submission to the panel he did not attempt to hide details of the arrangement from bank officials. "I did not have it locked up or placed in a secret drawer; it was a contract of the bank."

The issue has become a battle of wills between the US and Europe, with White House allies of Mr Wolfowitz saying the report did not "merit his dismissal".

The panel said Mr Wolfowitz "placed himself in a conflict of interest situation" when he became involved in the terms and details of Ms Riza's pay package and "he should have withdrawn from any decision-making in the matter".

European members - led by Germany, France and the Dutch - are pushing for Mr Wolfowitz to resign.

A US Treasury spokeswoman said: "This was a unique situation, mis-steps occurred on all sides and communication may not have been clear enough.

"The facts reveal that President Wolfowitz acted to find a pragmatic solution and to carry out the direction he received from the ethics committee."