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WASHINGTON, Wednesday (AFP) The United States lifted most remaining sanctions against Iraq in a bid to spur the country's redevelopment after decades of war and misrule, while warning it will not tolerate an Iranian-style Islamist regime there.

US officials also sought to downplay the latest outbreak of guerrilla violence after two US soldiers were killed in an ambush.

The newly-appointed UN special representative said he would arrive in Iraq by Monday to start work as US forces captured two more officials of the ousted Baath party regime.

The sanctions decision, announced by Treasury Secretary John Snow, aims to build on momentum created by the UN Security Council last week when it unanimously voted to put an end to 13-year-old trade sanctions imposed on Baghdad in the wake of its 1990 invasion of Kuwait.

The decision by and large restores free commerce between the two countries, with notable exceptions being trade in arms and cultural artifacts illegally removed from Iraq. "Today's action represents President (George W.) Bush's commitment to return the Iraqi people to the family of trading nations as soon as possible," Snow said in a statement. "The US has acted immediately to permit trade between the United States and a newly liberated Iraq and we call on other nations to do the same."

In New York, US Defense Secretary Donald Rumsfeld - taking aim at Iran's ruling Shiite clerics - said the United States will not permit interference in Iraq by its neighbours or their proxies.

"Indeed, Iran should be on notice: Efforts to try to remake Iraq in Iran's image will be aggressively put down," he said.

US officials also sought to downplay the perception that the latest fighting in Iraq undercuts the US-led administration's claim it was getting a hold on security nearly seven weeks after Saddam Hussein's overthrow.

The two soldiers were killed and nine others wounded when they came under attack in the flashpoint town of Fallujah, west of Baghdad, from a "hostile force of unknown size," US Central Command said.

The command said two of the attackers were also killed and six captured after the early-morning ambush. Initial reports indicated the shots had been fired from inside a mosque.

On Monday, ambushers had targeted a military convoy on the highway between the massive US military camp at Baghdad airport and the occupation headquarters in the city center, killing one soldier and wounding three others.

At the United Nations, Sergio Vieira de Mello, the UN special representative appointed Friday, said he intended to visit all of the country's 18 provinces during his four-month appointment.

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