May 14 (Bloomberg) -- A World Bank panel said President Paul Wolfowitz hurt the agency when he arranged a pay raise for his partner and questioned whether he should keep his job.

In response, U.S. Treasury Secretary Henry Paulson lobbied finance ministers today on the bank chief's behalf and argued that his mistakes aren't a firing offense. Paulson blamed the furor on a communications breakdown.

The panel's report found that Wolfowitz violated the terms of his contract, and urged the board to consider if Wolfowitz ``will be able to provide the leadership needed to ensure that the bank continues to operate to the fullest extent possible in achieving its mandate.''

The report was sent to the Washington-based agency's full 24-member board, which has the authority to fire or reprimand the former U.S. deputy defense secretary. Wolfowitz, who has vowed he won't resign in the face of ``bogus charges,'' is to appear before the board tomorrow to defend himself.

European nations including France, Germany and the Netherlands have been critical of Wolfowitz and have called for a quick resolution of the monthlong impasse. President George W. Bush, who nominated him in 2005, is the only world leader to say publicly he should keep his job.

Paulson ``spoke to some of his colleagues today from other countries and expressed that he does not think the facts merit dismissal,'' Treasury spokeswoman Brookly Mclaughlin said in a statement. Paulson cited missteps ``on all sides.''

American Clout

The U.S. has the most clout on the bank's board, with more than 16 percent of the total votes, followed by Japan with almost 8 percent, and Germany, France and the United Kingdom, with about 4 percent each. Other board members represent groups of countries with shares of 5 percent or less.

The board should avoid a ``rush to judgment,'' Wolfowitz's attorney, Robert Bennett, said today before the report was released. ``The perception is they are being unfair to Mr. Wolfowitz,'' he said. ``There should not be reinforcement of that by unfair and quick action.''

The report by the panel of seven directors also found that the 36 percent pay increase for Shaha Riza, along with promises of future raises, violated staff rules and that Wolfowitz ``placed himself in a conflict-of-interest situation.''

Riza, 52, was working at the bank as a communications officer in the Middle East and North Africa department when Wolfowitz arrived at the agency in June 2005. She was transferred to the State Department under the bank's rules on avoiding conflicts of interest.

Anti-Graft Drive

Critics have said the controversy has undermined the credibility of the bank, which under Wolfowitz's leadership has campaigned against corruption in developing countries that receive $23 billion in annual aid from the agency.

Vice President Dick Cheney, who served with Wolfowitz in two administrations, also came to his defense today.

``Paul is one of the most faithful public servants I've ever known,'' Cheney said in an interview with Fox News in Aqaba, Jordan. ``I think he's a very good president of the World Bank, and I hope he will be able to continue.''

Wolfowitz raised hackles among bank staff because of his role as an architect of the Iraq war when he served in the Defense Department in the Bush administration. He also served as undersecretary of defense for policy in the administration of George H.W. Bush, when Cheney was the defense secretary.

Travel Plans

Wolfowitz stuck to plans to travel to Slovenia and Germany this week. He has argued that he was only carrying out the instructions of the bank's ethics committee when he arranged the pay and promotion package for Riza. In a rebuttal to the panel's report, Wolfowitz said the document ``omitted substantial evidence'' and ``incompletely or erroneously'' described some documents and statements by witnesses.

The report conceded that the advice Wolfowitz received from the ethics committee ``was not a model of clarity,'' though it found that Wolfowitz erred in personally dictating the terms of Riza's contract. The committee said the board should review the ``governance framework'' of the bank.

The controversy erupted as Wolfowitz geared up a campaign to raise as much as $28 billion for the bank's International Development Agency, which dispenses aid to the world's poorest nations. Critics say it will be harder for the World Bank to raise money with Wolfowitz at the helm.

``I would rather give money to the World Bank if he leaves,'' Representative Barney Frank, the Massachusetts Democrat who chairs the House committee that helps determine U.S. funding for the bank, said in an interview on May 8.

To contact the reporters on this story: William McQuillen in Washington at bmcquillen@@bloomberg.net; Christopher Swann in Washington at cswann1@bloomberg.net

Last Updated: May 14, 2007 21:35 EDT