By David Rogers

WASHINGTON -- The House dealt a double blow to President Bush by rejecting his plan to cut small-business loan subsidies and making deeper cuts instead in his request for a nonprofit corporation supporting politically sensitive programs in Islamic nations.

Eighty-seven Republicans, led by Small Business Committee Chairman Donald Manzullo, of Illinois, broke with the White House in the 281-137 vote to shift $79 million among federal accounts in order to preserve the Small Business Administration's flagship loan program, without a further increase in fees.

Most of the funds -- about $60 million -- would come from the Justice Department, but the percentage reduction for the National Endowment for Democracy is larger and more serious. The $10.5 million cut yesterday follows prior reductions recommended by the House Appropriations Committee, and leaves Mr. Bush with just half of his initial $80 million request for the NED for the new fiscal year that begins Oct. 1.

The Endowment's projects in Pakistan, Afghanistan, Egypt and other Islamic nations are part of the president's diplomatic counteroffensive to strengthen democratic institutions and battle terrorism. Rep. Henry Hyde (R., Ill.), chairman of the House International Relations Committee, warned his colleagues: "We are on the defensive now. This is no time to tie us in knots."

But the proposed SBA cuts sparked a strong reaction among rural and minority lawmakers, who were under pressure from local businesses and the banking lobby to block proposed fee increases due to take effect in October.

Smaller borrowers would see fees double on loans of $150,000 or less, meaning a business would pay $1,700 -- or $850 more than they do now -- to secure a guarantee on a $100,000 loan. The annual fees charged banks and lenders would also climb to 0.5%, compared with 0.36% now.

Democrats voted overwhelmingly, 193-2, for the amendment, with Minority Leader Nancy Pelosi (D., Calif.) playing an active role in the debate. Both members of the party's presidential ticket, Sens. John Kerry and John Edwards, serve on the Senate Small Business Committee, and the strategy appeared to be part of a concerted effort to reach out to this sector.

Meanwhile, the resulting tension among Republicans was striking.

"We're not out of the woods yet . . . the last thing we need is to have more of a crimp in capital access for small business," Mr. Manzullo said. "I stand here in the gap as the chairman of the small business committee to say the Small Business Administration is wrong on this one. They ought to be ashamed of themselves."

Rep. Frank Wolf (R., Va.) responded in kind. "The reality of this amendment is that this is a subsidy to put money in the bankers' pockets," he said. "If you were helping the poor or the hungry . . . I would support the amendment . . . this is an amendment to put money in the pocket of bankers."

A senior member of the House Appropriations panel, Mr. Wolf is managing the underlying $43.5 billion spending bill funding not only SBA but the Departments of Justice, Commerce and State. Despite its importance, the White House yesterday raised a veto threat if any language is added to weaken the extraordinary powers given law enforcement and intelligence agencies under the Patriot Act adopted in 2001.The unusual pre-emptory action appears to be a warning by Mr. Bush that he will brook no defections in his party on this subject going into November.

The loan-fee dispute, in some respects, also dates back to the Sept. 11, 2001, terrorist attacks. Fees were reduced then to help small operators caught in the economic downturn. And the question now is how fast to go back to the old levels.

Mr. Bush's budget assumes that if fees go back to the 2001 level, the SBA will be able to self-finance essentially a still substantial $12.5 billion loan program for small businesses next year. Mr. Manzullo said he supports such a goal but worries by moving too fasts now the administration will drive lenders out the program.

The president was dealt another setback late last night when the House voted to overturn restrictions his administration issued on the gift parcels that Americans can send to family members in Cuba. The 221-194 vote was won by a coalition in which Democrats were joined by nearly four dozen farm-state and free-trade Republicans.

The administration has said the restrictions were aimed at weakening Fidel Castro. Mr. Bush is seeking support in the coming election from Cuban-Americans in Florida.