May 23 (Bloomberg) -- President George W. Bush said the U.S. is in direct confrontation with al-Qaeda in Iraq and the battle will determine the course of the war against terrorism.

Al-Qaeda leader Osama bin Laden wants to establish a terrorist base in Iraq to stage attacks against the U.S. and the danger to the nation ``has not passed,'' Bush said, using newly declassified intelligence reports to bolster his case.

``Al-Qaeda knows that our presence in Iraq is a direct threat to their existence in Iraq,'' Bush said in a commencement speech at the U.S. Coast Guard Academy in New London, Connecticut. ``If we fail in Iraq, the enemy will follow us home.''

Bush is under pressure from Congress and a majority of Americans, according to polls, to begin withdrawing troops from Iraq. The president used the commencement address to repeat his argument that if U.S. forces pulled out now, terrorists would fill the vacuum and convert Iraq into a staging area to wage war on free nations.

The president used his authority to declassify documents yesterday in advance of the speech. They assert that bin Laden in January 2005 ordered his top aide in Iraq, Abu Musab al- Zarqawi, to establish a terrorist cell to conduct attacks outside Iraq. Al-Zarqawi was killed in the U.S. bombing raid north of Baghdad in June 2006. Two other senior al-Qaeda operatives involved were captured or killed.

Danger Remains

``Despite the setbacks that al-Qaeda has suffered, it remains extremely dangerous,'' Bush said in his address to 229 graduating cadets and 5,200 guests. ``We can expect al-Qaeda to continue its campaign of high profile attacks, including deadly suicide bombings and assassinations'' posing greater risks for U.S. troops.

Michael O'Hanlon, a defense analyst at the Brookings Institution in Washington, said the intelligence Bush cited regarding al-Qaeda's presence in Iraq and its intentions isn't in dispute, and he has used the information before.

``But of course al-Qaeda wasn't really in Iraq before the invasion, so in broad historical terms the president can't justify his invasion that way,'' O'Hanlon said.

Public Skepticism

Thomas Mann, a presidential scholar at the Brookings Institution in Washington, said the president is attempting to halt the erosion of public support for the war by drawing the link to the broader war against terrorism.

``But his record of selective declassification of documents to bolster administration positions has understandably made the public deeply skeptical of such pronouncements,'' Mann said in an e-mail.

In making his case, Bush added some detail to previously disclosed plots for aviation attacks in Los Angeles and on the East Coast, including water reservoirs, the New York Stock Exchange, and U.S. military academies.

The attacks of Sept. 11 were ``just a down payment on the violence yet to come,'' Bush said. ``It's tempting to believe the calm here at home after Sept. 11 means that the danger to our country has passed,'' he said. ``I see the intelligence everyday. The danger has not passed.''

Disrupting al-Qaeda

Frances Fragos Townsend, Bush's Homeland Security adviser, told reporters traveling with the president that because of steps taken by the U.S. since Sept. 11 ``we've made it much more difficult for bin Laden today to communicate with his allies and partners around the world, including in Iraq. It doesn't mean he can't do it at all, we've just made it more difficult.''

Townsend said the intelligence wasn't being declassified for political purposes. ``If political advantage was the name of the game, we would have gotten it a lot sooner,'' she said.

The release of previously secret data came as congressional Democrats, short of the votes needed to override a presidential veto, gave up on their demand for a deadline for the withdrawal of troops as a part of legislation to fund military operations.

Instead, a compromise package hammered out among congressional leaders and the White House would provide at least $100 billion for the wars in Iraq and Afghanistan through Sept. 30, the end of the fiscal year. It also sets 18 benchmarks for Iraq and requires the president to make regular reports to Congress on the war.

It ties economic aid to the Iraqi government's progress in meeting the goals while allowing the president to waive that condition.

The package splits anti-war Democrats and will put the burden for passage on the minority Republicans. White House officials have signaled Bush would accept the measure.

To contact the reporter on this story: Catherine Dodge in New London, Connecticut, at cdodge1@bloomberg.net; Roger Runningen in Washington at rrunningen@bloomberg.net

Last Updated: May 23, 2007 13:14 EDT