(Updates with quotes, quotes) By Lesley Wroughton WASHINGTON, May 7 (Reuters) - A World Bank panel has found that bank President Paul Wolfowitz's handling of a promotion and pay increase for his companion represented a conflict of interest and broke rules, but made no recommendation on how he should be reprimanded, board sources said on Monday. The former U.S. deputy defense secretary, a key architect of the Iraq war, has been given several days to respond to the findings of the panel involving a lucrative deal for his companion, Shaha Riza, a World Bank Middle East expert. One source close to the World Bank board said the panel found Wolfowitz's actions amounted to conflict of interest, while another source said the panel found he broke internal rules by personally directing Riza's transfer to the State Department with a promotion and salary increase. A meeting of the 24-nation World Bank board, which will determine whether Wolfowitz should be fired for his actions, is now scheduled for later in the week, possibly on Friday. "There is no unanimity over how this should be resolved, which is why the ad hoc committee has left it to the board," said one board source, who asked not to be identified. A senior bank official repeated that Wolfowitz would not resign over the controversy, which he has said is part of a smear campaign designed to discredit his leadership and undermine his anti-corruption campaign. As Wolfowitz started a critical week, one of his top aides, Kevin Kellems, resigned early on Monday, saying the turmoil at the bank over its current leadership has made it difficult for him to do his job. Kellems, who served as an advisor to Wolfowitz at the Pentagon from 2002, told Reuters he was leaving to pursue other opportunities. "Given the current environment surrounding the leadership of the World Bank Group, it is very difficult to be effective in helping to advance the mission of the institution," Kellems said. "I have tremendous respect and admiration for the bank staff and management and treasure the many friendships," he said. DEPENDING ON AIDES Wolfowitz's two years at the bank have been marred by criticism that he depended on a coterie of aides from the Pentagon and White House, including Kellems and Robin Cleveland, who had little experience with the bank's ways. It worsened Wolfowitz's standing among the bank's long-time career staff, who were isolated from the decision-making. According to board sources, there is "widespread feeling" among member countries that it is virtually impossible for Wolfowitz to finish his term because of the damage to the bank's credibility and its ability to be effective. In Brussels, Dutch Finance Minister Wouter Bos stressed it was important that the bank's reputation not be undermined. "The bank can only do a good job if there is a good and sound reputation," Bos told reporters. "I am concerned about this reputation at the moment." Still, the key to whether Wolfowitz stays or goes is if the United States, the bank's biggest shareholder who nominated Wolfowitz for the job, pressures the board, especially European countries, to allow Wolfowitz to continue. It is still undecided whether a decision on Wolfowitz will be determined through board consensus or a vote. U.S. President George W. Bush made clear his support for Wolfowitz when he raised it during an April 30 meeting with German Chancellor Angela Merkel at the White House, bank and board sources who have details of the meeting told Reuters. The controversy also has raised questions about the bank's selection of its president and the transparency of the board. Since the bank's inception after World War Two, the United States has always nominated the president without objection while the head of its sister institution, the International Monetary Fund, has always been a European.
