Iraq has denied a report that it is rebuilding its arms industry with sanctions-busting shipments arranged through a secret purchasing operation set up in Jordan.

The Ministry of Information described a report Sunday in Britain's Observer newspaper as part of "a campaign of distortion and propaganda against Iraq and a probable move to prepare the ground for some new measure against the country.""The (U.N. trade) embargo and blockade have been so firmly and brutally implemented, that even food and medicine are not allowed to reach Iraq," a spokesman said.

He added that the Iraqi government was making every effort to arrange food for its people and rebuild facilities damaged by the United States and its gulf war allies.

The Observer quoted Jordanian sources as saying Saddam Hussein had set up a huge purchasing network in Jordan to buy weapons and equipment, banned by the U.N. sanctions, to refurbish his war-shattered arms industry.

It quoted U.S. defense and intelligence sources as saying Iraq was smuggling in stocks of spare parts and ammunition from North Korea and China.

Cargoes were being shipped through Singapore, where they were reloaded to disguise their point of origin.

Shortly before the allied forces launched their assault to drive Iraq out of Kuwait in January, the United States accused North Korea of supplying Baghdad with arms. Pyongyang denied the charge.

The Observer said Saddam was preparing his armament factories to resume production of weapons, ammunition and armor plate, needed by the Iraqi government to put an end to Kurdish and Shiite revolts.

Purchases were being financed by funds held by Iraq in Jordanian and Swiss bank accounts set up before the war, the report said.

The U.S. Navy, meanwhile, says allied warships will continue intercepting Iraqi-bound shipping until a U.N. inspection procedure is established. Jordan claims the blockade is unjustly hurting is economy.

The decision to continue enforcing the U.N.-ordered embargo on trade with Iraq was made by the 11 nations with naval forces still in the region, the U.S. Central Command said in a statement on Sunday.

Coalition forces say they have challenged more than 9,000 commercial vessels in the Persian Gulf or the upper reaches of the Red Sea, boarding more than 1,200 and turning back at least 50 under the U.N. embargo.

Jordan is complaining that many of those vessels were headed for its only port, Aqaba, carrying goods destined for Jordanians, not Iraqis.