WASHINGTON, July 11, 2001 -- After a day of intense criticism, the Bush administration rejected a proposed regulation Tuesday that would have let religious groups receive federal money even if they refused to hire gays and lesbians.

The controversy drew the ire of gay rights groups as well as lawmakers who are being asked to pass President Bush's proposal to allow "faith-based" organizations to use federal tax dollars to provide social services

An internal report of the Salvation Army suggested that the Bush administration, in exchange for the charity's support for its initiative before Congress, would help religious groups skirt state and municipal laws that bar job discrimination against gays.

Such laws usually do not apply to religious groups, but it is not clear whether they would if the groups took federal money under Bush's proposal.

Aides said the White House reviewed the Salvation Army request and decided that language in existing laws and Bush's faith-based initiative offers religious charities adequate protections.

"These protections ensure that religious organizations have the right to hire individuals who share their religious faith. They also ensure that such organizations comply with civil rights laws," Bush press secretary Ari Fleischer said.

Gay rights leaders want the issue settled by Congress during consideration of Bush's bill.

"The question of whether or not the federal government should be providing special protections to religious organizations to discriminate against gay and lesbian Americans with federal taxpayer dollars deserves broad public debate," said Winnie Stachelberg of the Human Rights Campaign, a gay and lesbian rights group.

Vice President Cheney and other administration officials said churches and other religious groups should be allowed to stick to their principles in running social service programs with government money.

The controversy could cause problems for Bush's initiative, which will begin to be debated today when the House Ways and Means Committee takes up a key part of the proposal. Rep. Pete Stark, D-Calif., said he plans to raise objections to the possibility that the initiative will cause discrimination.

Stark said the discrimination flap is a blow to the bill, because it shifts the debate from separation of church and state to fairness.

"The American people want to be fair," Stark said. "Once it gets to that level, the president has a real fight on his hands."

Sen. Joe Lieberman, D-Conn., who has been supportive of the initiative, said, "It will just deepen opposition and make many of my colleagues more skeptical."

Rep. Bobby Scott, D-Va., who opposes the bill because of fears that it will prompt government regulation of religious groups, called a meeting of black members of Congress and church leaders to map a strategy for its defeat.

The controversy arose after The Washington Post reported the White House had struck a deal with the Salvation Army, considered the nation's largest charity based on donations.

In exchange for the Salvation Army doing heavy lobbying for Bush's initiative, the White House would propose the hiring exemption for religious groups receiving federal money, the report said.

The Salvation Army and the White House denied that any deal had been made, although both said they had discussed the matter and a new regulation was being considered.

The Salvation Army said the report overstated the strategic relationship between the two issues, though spokesman David Fuscus said the regulation is needed.

"As a church, the army does insist that those people who have religious responsibilities, who are ministers, share the theology and lifestyle of the church," he said.

The faith-based bill, which the House Judiciary Committee approved last month with mostly Republican support, would allow religious charities to compete for $8 billion a year in federal social service funds.

The charities would be free to not hire someone of another religion. They would not be allowed to discriminate because of age, sex, race, national origin or disability. The proposal makes no mention of sexual orientation.

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