BEIRUT, Lebanon  -- On an August morning, men in T- shirts and baseball caps guard metal barricades that block the street leading to the al-Mehdi al-Shahid high school in southern Beirut, Lebanon, black sports bags hanging menacingly off their shoulders.

Inside, other guards in jeans watch as 500 people wait for aid beneath yellow flags that bear a fist clenching a Kalashnikov assault rifle, the symbol of Hezbollah, the Shiite Muslim group that fought Israel to a draw earlier in the month.

Upstairs, past posters of Iran's supreme leader, Ayatollah Ali Khamenei, silver-haired Ali Ahmad Sharara tells a Hezbollah worker that he lost his home in Israeli bombings and now lives with his children. ``It's so badly damaged that it will fall down or be pulled down,'' says Sharara, a former shoe factory owner.

Without hesitating, the worker reaches into a black plastic shopping bag and takes out $12,000 in a bundle of new $100 bills. Sharara, 62, pockets more than twice the average annual Lebanese salary. All told, Hezbollah may pay out as much as $180 million in cash for rent and furnishings for people made homeless after the group's July 12 kidnapping of two Israeli soldiers incited 33 days of Israeli bombing, says Riad Salameh, governor of Lebanon's central bank.

For Sharara, the payout comes after he registered with Hezbollah as a war victim just 48 hours earlier.

``If Hezbollah hadn't taken care of those who'd lost their homes, it would lose support,'' Lebanese Finance Minister Jihad Azour says. ``Politically they had to do it.''

Biggest Test

Money paves the way for Hezbollah's influence in Lebanon. Now, in what may be the biggest test of its clout, the group is striving to win the peace, aided by what the U.S. Treasury Department estimates is a $200 million budget from Iran.

Hezbollah leader Sheikh Hassan Nasrallah has promised to rebuild decimated apartment blocks and restore neighborhoods from the hard-hit suburbs south of Beirut to bombed-out villages and towns in the south, all within three years, starting with the $12,000 handouts.

``You won't need to ask a favor of anyone, queue up anywhere,'' Nasrallah, 46, assured the victims, who are largely his own Shiite supporters, in a television address immediately after the Aug. 14 cease-fire.

With Iran's help, Hezbollah, Lebanon's only political party with an armed militia, builds schools, hospitals and orphanages. It has delivered fresh water and provided trash collection to areas that the government has neglected and raised the social standing of Lebanon's 1.2 million Shiite Muslims, the poorest group among the country's approximately 4 million people.

Social Role

Hezbollah's charities support the families of men killed or injured fighting Israel, which is the party's sworn enemy and one it vowed to destroy in its manifesto in 1985.

During the war, Hezbollah fired almost 4,000 rockets into Israel and struck an Israeli ship with a C802 Noor guided missile obtained from Iran. Hezbollah's Zelzal rocket, also from Iran, has a range of 120 miles (193 kilometers), enough to reach Tel Aviv, says Brigadier General Yossi Kuperwasser, a senior Israeli intelligence officer.

Finance Minister Azour says he, for one, is skeptical that Hezbollah's fistfuls of dollars will be enough to make a dent in Lebanon's devastation.

``Compared to the level of reconstruction, it's peanuts,'' he says of Hezbollah's monetary relief effort.

In Dahiya, a few miles from downtown Beirut and home to Sharara and 300,000 of Hezbollah's staunchest backers, the seven-story, tan brick school that serves as a makeshift administration headquarters is one of the few buildings standing. Nearby streets are impassable.

`Never Would Have Done It'

Across the country, more than 130,000 homes are in ruins. The Israeli bombing knocked out most of Lebanon's bridges, half of its highways, its airport, one power station, 14 power generation units, two hospitals and numerous factories.

Damage to Lebanon's economy, estimated at $3.6 billion to repair the infrastructure alone, may rise to $9 billion-$11 billion once the loss of earnings from tourism, exports and sales are added, says Marwan Barakat, head of research at Beirut's Banque Audi, Lebanon's second-biggest lender.

Nasrallah, who wears flowing robes and a black turban, a sign that he's a descendant of the Prophet Muhammad, said he didn't expect Israel's massive retaliation.

``Had I known that capturing the soldiers would lead to this result, I never would have done it,'' he said during a two- hour televised address on Aug. 27.

Iran's Nuclear Plans

As the $12,000 cash bundles change hands and the awareness of the devastation sets in, Lebanese are assessing the cost of the war and Hezbollah's links to Iran, says Boutros Harb, a former minister of education and a Christian member of Parliament.

Harb says the Hezbollah kidnappings may have been timed to divert attention from Iran's nuclear plans as the Group of Eight, the seven largest industrialized nations and Russia, met in Moscow in July.

Iran ignored a United Nations Security Council deadline to stop its uranium enrichment program by the end of August. The U.S., which charges that Iran is hiding secret work to make nuclear arms, is pushing for UN sanctions.

``Nasrallah has been exposed as someone who follows the direction of Iran,'' Harb says. ``The handouts are a bribe to keep people from asking questions.''

In the mainly Christian district of Achrafieh, which escaped the bombings, cafes brim with young Christian and Sunni Lebanese enjoying Beirut's night life. The war and its aftereffects are favorite topics.

Critics Gather

``Hezbollah stood up to the Israelis, but look at the costs,'' says lawyer Nader Husseini, who is a Sunni. ``It will take years for us just get back to where we were.''

Even some Shiites are criticizing Hezbollah. ``The war was forced upon the country and people, who did not want it,'' Ali al-Amin, the mufti, or religious leader, of Tyre, Lebanon's second-biggest city, said in an Aug. 22 interview with Beirut's Al Nahar newspaper. ``The Shiite community in Lebanon authorized no one to declare war in its name.''

In the U.S., the Treasury Department is using the war as a platform to persuade European banks to cut support for what it says are terrorist groups. The U.S. labeled Hezbollah a foreign terrorist organization in 1997, putting it in the same category as al-Qaeda and Peru's Shining Path. The UN and the European Union haven't done so.

During a weeklong tour in September, Stuart Levey, U.S. Treasury undersecretary for terrorism and financial intelligence, traveled to London and then on to other European capitals to meet bank officials whom he declined to identify.

Isolating Iran

``It's our assessment that Iran is providing $200 million a year in monetary assistance to Hezbollah,'' Levey says. By comparison, the U.S. gives $3 billion in annual aid to Israel.

The U.S. wants international banks to help isolate financial institutions involved in terror funding, Levey says. ``We are seeing banks and other institutions reassessing their ties to Iran,'' he says.

On Sept. 16, Treasury Secretary Henry Paulson told the G-7 finance ministers and central bankers, who were meeting in Singapore, that he was surprised to learn the extent to which Iranian front companies had infiltrated the international banking system. Both the Treasury and State departments point to Iran as the backer of Hezbollah's attacks, saying it provides monetary and logistical support.

``Iran has been the country that has been in many ways a kind of central banker for terrorism in important regions like Lebanon through Hezbollah in the Middle East,'' U.S. Secretary of State Condoleezza Rice said in March.

Unregistered Flights

Even before the fighting in Lebanon ended, Iran committed to fund Hezbollah's relief effort, says Nehme Tohme, Lebanon's minister for the displaced. Tohme says Hezbollah officials told him that Iran would provide Hezbollah with an ``unlimited budget'' for reconstruction once the shooting stopped.

In all likelihood, the crisp $100 bills that Sharara and other bombing victims pocketed were flown from Tehran to Damascus, on an unregistered flight, says Magnus Ranstorp, author of ``Hizb'Allah in Lebanon: The Politics of the Western Hostage Crisis'' (Palgrave Macmillan, 275 pages, $39.95).

``From there the money would be put on a number of small trucks and sent across the border,'' says Ranstorp, chief scientist at the Stockholm-based Centre for Asymmetric Threat Studies at the Swedish National Defence College, which trains Sweden's armed forces.

`Classified Budget Item'

Mohsen Sazegara, a founder of Iran's Revolutionary Guards, a military organization created in 1979 to defend Iran's Islamic Revolution, says Hezbollah's funds may originate with a branch of the guards called the Qods Force. The design on Hezbollah's flag of a clenched fist holding a Kalashnikov is almost identical to the symbol of the Revolutionary Guards.

``The budget for the Qods Force is a classified budget item,'' Sazegara says. ``This is not reflected in the Iranian general budget.'' Sazegara, who is now a visiting scholar at Harvard Law School in Cambridge, Massachusetts, is a former Iranian deputy prime minister who left the government in 1989 and was jailed for 114 days in 2003 for his dissident views.

The central bank's Salameh says the $100 bills weren't from Lebanon, which faced a shortage of dollar notes during the war.

``The money did not come from Lebanon's banking system,'' he says, as he smokes a Cuban cigar in his office two miles north of the devastated southern suburbs of Beirut.

Signs of Iran's involvement in the rebuilding and in previous aid efforts are everywhere in the southern suburbs. Iran distributed more than 40 power generators to temporarily restore electricity. The $1 million program will supply enough fuel to meet power needs of each southern village for at least three months, according to the Iranian Red Crescent, a humanitarian relief organization.

Nasrallah Posters

Dozens of blue contribution boxes in the shape of cupped hands collect for the Iranian charity locally known as Emdad, or the Imam Khomeini's Relief Committee. It's named for Ayatollah Ruhollah Khomeini, the founder of Iran's Islamic Revolution.

Ali Zreik heads Lebanon's branch of Emdad. He's also the mayor of Khiam, a town of 40,000 people a mile from the Israeli border.

Getting to Khiam requires navigating knocked-out bridges and blasted highways. Pictures of Nasrallah, with his bushy beard and square-framed glasses, stare out from posters. Some billboards depict Katyusha rocket launchers with the slogan ``Divine Victory.'' Hanging from lampposts are banners, bleached by the sun, of men killed in the fight against Israel.

On a hilltop north of Khiam across the Litani River, a Hezbollah sign measuring 30 feet (9.1 meters) wide welcomes visitors to ``Liberated Lebanon,'' a reference to the departure of the Israel Defense Forces in 2000.

Israeli Invasion

In 1982, Israel invaded Lebanon to drive out Palestinian guerrillas who were firing rockets and bombarding Israeli towns. After Israel seized Beirut, it evicted the armed Palestinian groups to Tunisia. A multinational peacekeeping force of U.S., French and Italian troops arrived.

The Israeli army continued to occupy southern Lebanon, terming it a security buffer, in spite of Security Council resolutions that called on Israel to leave. Hezbollah countered with a series of attacks, including suicide bombings against Israeli positions. In 2000, after 18 years of occupation, Israel withdrew.

In the recent fighting, more than 80 percent of Khiam has been completely or partially destroyed, Zreik says. ``If the government will not help with reconstruction, Hezbollah will,'' he says.

As Zreik, 54, sits in his office, volunteers and engineers wander in with damage reports. He speaks fluent Farsi that he learned in Iran after the Islamic Revolution.

Volunteering in Iran

Before joining Emdad, Zreik was a volunteer at Bonyad-e Shahid, or the Martyr's Foundation, which funds families of fighters who died battling the Israeli army. He says he talks with the leader of Emdad in Tehran two or three times a week. Emdad's Iranian Web site says the charity's Lebanese branch had a budget of $12.6 million for the year ended in March 2005.

``At Emdad, we provide welfare payments for 5,000 families and 4,200 orphans,'' says Zreik, who says his budget is $7 million. ``We make the money go three times as far; that's what I learned from Iran.''

Mehdi Khalaji, an Iranian visiting scholar at the Washington Institute for Near East Policy, says Iranian funds have helped construct more than 90 schools through a charity called Jihad al-Binna, or Reconstruction Crusade, which is also the main force behind Hezbollah's reconstruction efforts.

``Hezbollah is Iran in Lebanon,'' Khalaji says. ``When Iran's leadership looks at Hezbollah, it sees itself.''

`Same Pool of Money'

U.S. Treasury officials say they make no distinction between Hezbollah's militia and its charities.

``The bomb throwers and hospitals get their money from the same pool of money,'' says Daniel Glaser, deputy assistant secretary for terrorist financing and financial crimes at the Treasury.

In September, the U.S. cut off one path of what it says is Iran's influence to Hezbollah. The Treasury Department imposed sanctions on Iran's state-owned Bank Saderat Iran, which has the largest network of branches in Iran.

Treasury Undersecretary Levey says Bank Saderat has transferred funds from the Iranian government to Hezbollah and to radical Palestinian groups, including Hamas and the Palestinian Islamic Jihad. Since 2001, a Hezbollah-controlled organization, which Levey declined to name, has received $50 million directly from Iran through Saderat via London, he says.

``That path is now closed,'' Levey says.

`Not Much We Can Do'

Saderat arrived in Lebanon in the early 1960s and has offices in Dahiya and in the Bekaa Valley. On its Web site, the bank says it complies with Islamic banking and international regulations and won't be affected by U.S. sanctions. Like all Iranian financial institutions, Saderat is prohibited from having direct access to the U.S. banking system.

In the past, Hezbollah has had no trouble transferring funds directly from Iranian banks such as Bank Melli Iran and Saderat, both of which have branches in Beirut's southern suburbs, Israel's Kuperwasser says.

Israel hasn't been able to penetrate Hezbollah's financial structure the way it has that of Hamas, another Islamic group that has sworn to destroy the Jewish state. Palestinians have had to go through the U.S. and Israeli bank systems to transfer money, Kuperwasser says.

``We've had the opportunity to intervene,'' he says. ``In Lebanon, there's not much we can do.''

Revolutionary Guards

The U.S. has been trying to break Hezbollah and chip away at its Iranian supporters for two decades. In 1982, Iran's then ambassador to Syria, Ali Akbar Mohtashamipour, encouraged radical Shiites to split from Amal, the mainstream Shiite political party. His followers set up camp in Baalbek, Lebanon, near the Syrian border. Iran sent more than 1,000 Revolutionary Guards to train Hezbollah, which at the time was a loosely organized group mainly made up of Shiites who opposed the Israeli invasion.

In 1988, Hezbollah won a bitter war against Amal for control of Beirut's Shiite neighborhoods.

``Syria supported Amal and Iran supported Hezbollah,'' says Ali Fayyad, a member of Hezbollah's politburo, which advises the group's highest decision-making body. ``At the time there wasn't an understanding between Iran and Syria.''

Judith Palmer Harik, a former professor at American University of Beirut, says that Hezbollah started to deliver social services after it took control of Dahiya. First was reliable trash removal, five years before the central government sent any garbage trucks to the area.

Water Tanks

When there was a water shortage, Iran provided giant, 4,000-liter (1,057-gallon) water tanks in each district and filled them five times a day. Some of the water tanks, bearing the Iranian flag, are still around 16 years later.

``Hezbollah's popularity is due to their social programs, which in some areas complement government's efforts,'' Palmer Harik says. ``With Hezbollah, when they promise something, they usually deliver. The money goes where they say it will.''

At the end of the country's 15-year-long civil war in 1990, Lebanon's militias agreed to disarm, with the exception of Hezbollah. The group argued that it needed weapons to push the Israeli army out of the parts of Lebanon occupied since 1982. The Lebanese government recognized Hezbollah as a legitimate national resistance movement.

Two years later, Hezbollah entered Lebanon's political arena, winning 12 of 27 seats allocated to Shiites in the 128- seat parliament. Today, it has 14 members in the parliament, compared with 15 for Amal, and controls two cabinet posts in the coalition government headed by Prime Minister Fouad Siniora. In local elections, Hezbollah won control of 21 percent of Lebanon's municipalities.

Terrorism Charges

In 1996, U.S. Secretary of State Warren Christopher highlighted the link between Hezbollah and Iran, saying that Iran was providing $100 million a year to Hezbollah -- about the same as the budget of a small U.S. university.

Daniel Byman, associate professor in the Edmund A. Walsh School of Foreign Service at Georgetown University in Washington, says Iran's help was about $30 million-$50 million before the July 12 war. ``Iran doesn't have unlimited resources,'' Byman says.

In 2001, the late Secretary of Defense Caspar Weinberger said the U.S. believed Hezbollah was behind three car bombings in 1983 that killed 350 people at the French and U.S. embassies and the U.S. Marine compound, all in Beirut. U.S. officials say Hezbollah was responsible for kidnapping Westerners as hostages in Lebanon and for the 1985 hijacking of TWA Flight 847 and its 153 passengers and crew, which resulted in the death of a U.S. Navy diver. Hezbollah has denied involvement.

`A-team of Terrorists'

``Hezbollah may be the A-team of terrorists,'' Deputy Secretary of State Richard Armitage said in 2002. ``And maybe al-Qaeda is actually the B-team.''

Sitting in a coffee shop across from the American University in Beirut, Hezbollah's Fayyad, 44, ponders the U.S. accusations. He's one of Nasrallah's political advisers and among Hezbollah's top officials.

``There was too much chaos in the early 1980s and Hezbollah did not have an organization,'' Fayyad says, responding to the charges that Hezbollah had carried out the Beirut bombings. In 1983, a group calling itself Islamic Jihad claimed responsibility for the three attacks.

``Many groups were fighting Israel and it was not possible to know who was Hezbollah and who wasn't,'' Fayyad says.

Viagra and Cigarettes

In September, U.S. District Judge John Bates in Washington ordered Iran to pay $317 million to victims of the 1983 U.S. Embassy bombing. He determined that the country had provided support to Hezbollah terrorists who had staged the attack. Iranian officials didn't appear in court to defend against the claims.

Fayyad says Hezbollah receives money from a number of sources, such as religious donations. Shiites are expected to donate 20 percent of their incomes to charitable organizations in the form of contributions known as khoms, he says.

Money also has flowed in from illicit activities such as counterfeiting dollar currency, pirating software and selling fake drugs, says the Treasury's Glaser. ``Hezbollah operates like a crime family,'' he says.

In March, the office of the U.S. attorney in Detroit indicted 18 people for dealing in contraband cigarettes to avoid Michigan taxes, selling counterfeit Viagra pills and sending some of the profits to Hezbollah. Two key operatives escaped, and three have pleaded guilty.

Baby's Blanket

A trial is set for early next year, says Kenneth Chadwell, an assistant U.S. attorney in Detroit. He estimates that Michigan may have lost $20 million in unpaid taxes. He declines to make an estimate of how much of that sum ended up with Hezbollah.

``Their primary organizing principle was their loyalty to Hezbollah,'' Chadwell says. ``Our action is against an avowed enemy of the U.S.''

On the streets of Dahiya, Ghaleb Abo Zeinab, another member of Hezbollah's politburo, mingles with volunteers amid the bomb craters. ``The government is not working fast enough so Hezbollah has to move first to help the people,'' Abo Zeinab, 44, says. ``Waiting for bureaucracy can take months.''

Zahra Darwish, wearing a patterned scarf and long mustard- colored raincoat, has just climbed a 30-foot-tall mountain of rubble and emerged with a baby's blue blanket salvaged from what used to be her home.

``Nasrallah said he'll rebuild and he keeps his promises,'' she says.

`Divine Victory'

All around, the work of repairing bridges, roads, buildings and power stations looms. Red banners proclaiming ``Divine Victory'' and ``Made in U.S.A.'' proliferate in the rubble. From the collapsed remains of one building, an Iranian flag hangs defiantly. Giant posters of Iran's Ayatollah Khomeini and Khamenei keep an eye on the proceedings.

``Many think that Hezbollah has become stronger,'' parliament member Harb says. ``I think the reverse is true. They are weaker because they are now vulnerable.''

With stretches of Lebanon that Hezbollah seeded with schools, hospitals and clinics reduced to ruins and its political clout on the line, funding the peace -- even with what may be an open purse from Iran -- may carry a greater cost than fighting the war. (Bloomberg)