The loophole will allow US banks to deal with Indian banks, many of which are partially owned by the government. Key US officials who briefed the media on the fine print of sanctions said an executive order would be issued shortly to clarify what constitutes loans and credits, but said US laws merely required banks to cease making loans to governments. It does not cover operations of private banks, the official clarified.

The sanctions also allowed passage of humanitarian aid which was broadly defined as anything that involved education, rural development, health, low cost housing, sewage etc. US officials indicated that this definition may be expanded in due course.

The sanctions were detailed under six heads including denial of credit and credit guarantees to US entities doing business in India; blocking of loans by multilateral organisations; and a virtual embargo on dual use items. Senior administration officials acknowledged the sanctions were calibrated to avoid doing damage to American businesses. US firms will still be allowed to invest in India although they may not get coverage from American banks.

Specifically, officials said US banks can continue to operate in India and indicated that they will be allowed to lend to parastatals i.e quasi-government firms and banks. In effect, contrary to fears expressed in some quarters, US banks will be allowed to do business with Indian banks, some of which are partially owned by the government of India.

Indian analysts said the sanctions were on expected lines and allowed New Delhi some breathing room. ``It's not as bad as it could have been. But primarily the US companies have done their bit to preserve their self-interest. In the process, we also benefited a little,'' a Washington-based representative of an Indian trade organisation said.

However, Washington has come down hard on dual use items and imposed a virtual embargo in this area. Both India and Pakistan will be denied dual use items on the slightest suspicion although officials said Washington ``will continue to favourably consider on a case-by-case basis transactions which do not support nuclear, missile or inappropriate military activities.''

``But there will be a strong presumption of denial and in short we will have a broad area of discretion,'' a commerce department official said, indicating that Washington will clamp down on dual-use items going to even academic and educations institutions if it felt the items had the potential of being misused.

Asked about the possibility of other European Union countries stepping in to do business with India in the vacuum created by US withdrawal, Deputy Secretary Strobe Talbott said ``we hope our allies and partners will resist the temptation to exploit the situation. This (non-proliferation) is something that goes to the core of every country.''

Officials at today's briefing, specifically called to detail sanctions against India and Pakistan, said the G8 countries had so far blocked loans worth $ 1.1 billion to India and $ 54 million to Pakistan. They expected India to be denied $ 2.5 billion and Pakistan to be denied $ 1.5 billion annually.