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Questions Arise Over Ahmadinejad's Motives; Investigation Continues into Recent Mid-Flight Problem; Pakistan Says More Weapons Needed to Fight War on Terror; Viewers Object to Beijing Olympics/McClellan's Accusation Denied by White House and Fox News

Aired July 28, 2008 - 17:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


BLITZER: And to our viewers, you're in THE SITUATION ROOM.
Happening now, an olive branch or a bold threat? Iran's leader seems to take a new tone towards the United States but what's behind his latest boast about Iran's nuclear program?

Investigators think they may know now what ripped a gaping hole on the side of an airliner mid-flight. Here is the question, is your flight safe?

And amid word of a missile strike on a top al Qaeda leader, is Pakistan doing its part in going after Osama bin Laden? My exclusive interview with Pakistan's prime minister, Yousuf Raza Gilani. He's here today.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

Iran's hard-line president may be taking a new line towards the United States. Key word, "may." Could terms like "Great Satan," "Axis of Evil," soon be relegated to the history books? An interview today with President Mahmoud Ahmadinejad offering some potentially new insight into this man, also raising some significant questions.

Let's get the details from CNN's Brian Todd, he's working the story for us. What do we know, Brian?

BRIAN TODD, CNN CORRESPONDENT: Wolf, on one level, Iran's president does seem to be extending an olive branch. But in Washington his comments bring a familiar question, does he really mean it?

(BEGIN VIDEOTAPE)

TODD (voice-over): On the surface, a striking hint by Iran's president, he might be willing to reach common ground with America and its allies over his country's nuclear program. In an interview with NBC News, Mahmoud Ahmadinejad says, if sending its own diplomat to the latest round of talks signals a change in America's approach to his country.

PRESIDENT MAHMOUD AHMADINEJAD, IRAN (through translator): We will be facing a new situation and the response by the Iranian people will be a positive one.

TODD: In Washington, there's skepticism.

DANA PERINO, WHITE HOUSE PRESS SECRETARY: I think we have to approach this about w a big grain of salt. President Ahmadinejad said one thing to the Iranian people on Saturday, and another thing to an American journalist on Monday.

TODD: A reference to Ahmadinejad's claim over the weekend that Iran now has 6,000 centrifuges for enriching uranium. Weapons experts say that may be an exaggeration but if it's true it could put Iran just months away from having the ability to produce a nuclear weapon. Why would Ahmadinejad say that, and then talk about diplomatic options 48 hours later?

KARIM SADJADPOUR, CARNEGIE ENDOWMENT FOR INT'L PEACE: What the Iranians are trying to do is essentially to create facts on the ground to send a signal to the West that our nuclear program, as Ahmadinejad once describes it as a train with no brakes, that Iran is moving forward, that they cannot be stopped but that they are willing to have a more conciliatory negotiation session with the West.

TODD: But that doesn't mean Iran is ready to concede anything, repeatedly in the interview, Ahmadinejad is asked will you meet Saturday's deadline by the major powers to agree to not add any new centrifuges in exchange for a freeze in sanctions? Repeatedly he sidesteps.

(END VIDEOTAPE)

TODD (on camera): Now at one point, Ahmadinejad did say that nuclear bombs belong to the 20th century, and that his country's not working to manufacture a nuclear weapon. It's a claim he and other Iranian officials have made several times in recent years, a claim U.S. officials still don't believe -- Wolf?

BLITZER: How much pressure is he really under to accept Saturday's deadline to come up with a firm answer on whether or not Iran will stop enriching uranium, at least a temporary freeze?

TODD: Well, I spoke with former U.N. weapons inspector David Albright about that. He believes that Iran is under enormous pressure right now to accept the deal. He says if they don't the U.S. can point to that as rationale for sanctions and even for leaving that military option on the table and he says this time, unlike previous times, Russia and China likely won't back Iran up so they'll be more isolated.

BLITZER: We'll see what happens with the Saturday deadline, thank you, Brian.

In Iraq, at least 70 people were killed and more than 300 wounded in a wave of attacks carried out today by female suicide bombers. CNN's Arwa Damon is in Baghdad. Arwa?

ARWA DAMON, CNN CORRESPONDENT: Wolf, today's attacks were brutal reminder that the violence here is not quite yet a thing of the past.

(BEGIN VIDEOTAPE)

DAMON (voice-over): These are all too familiar images in Iraq, but the nature of Monday's attacks is raising alarms. Four suicide bombings, all apparently car rid out by women and all apparently designed to inflict maximum casualties among civilians. In Kirkuk, according to the police, a woman ran through a crowd of Kurds holding a demonstration, before detonating explosives, killing scores and wounding well over 100.

In Baghdad, the target was a Shia religious procession and the attack was well-coordinated, as hundreds of thousands of pilgrims were marching towards the shrine, three women detonated explosives within half an hour, killing dozens, wounding many more.

In the capital, it's the type of violence the government thought it had taken sufficient measures to avoid, setting up checkpoints, and conducting foot patrols to protect the pilgrims, even deploying more than 200 women specifically to search females around the Imam Khadem (ph) Shrine, the destination of the pilgrims Monday.

"Women, children and young men were killed in the explosion," this woman says.

This is an insurgency that's shown its ability to exploit weakness. The female suicide bombers simply struck pilgrims in an area where they weren't being searched. The use of female suicide bombers is not new to Iraq, but recent numbers show a shocking increase.

Brigadier General Kasa Mata (ph), the spokesman for the Baghdad command says, "The number of male suicide bombers started decrease so long they resorted to the cheapest tactic, and that is the use of women."

According to the U.S. military, there were eight female suicide bombers in 2007. In the first seven months of 2008, there have been at least 24. They seem to have various motives. Some have links to al Qaeda and want revenge for brothers or husbands who have been killed. Others are coerced or suffer deep psychological illnesses, aggravated by years of suffering and violence. They are easily lured by promises of heavenly rewards.

(END VIDEOTAPE)

DAMON (on camera): The last year has seen a dramatic decrease in the violence, so this spate of suicide bombings intended to fuel sectarian tensions is rather worrisome, and right now, the Iraqi security forces just aren't equipped to deal with the threat posed by desperate women, who are very vulnerable, and for whom life seems to be utterly hopeless -- Wolf?

BLITZER: Arwa, thank you. Arwa Damon is in Baghdad.

These Iraq attacks, by the way, follow some devastating weekend bombings in Turkey and India. In Istanbul thousands of mourners gathered for funerals for some of the 17 people killed by twin blasts in a crowded city square. Turkish officials blame the Sunday night bombings on Kurdish rebels, calling them a possible retaliation for Turkish air strikes on strongholds in northern Iraq.

A day earlier, 17 bombs tore through the western Indian city of Ahmadabad, killing at least four dozen people. An obscure Islamic militant group said it was behind the attacks. Police in Mumbai raided the home of an American citizen, seized a computer which officials say may have been the source of an e-mail claiming responsibility. Take a look, that's some of the looks that we're showing around the world, right now.

Let's turn back to Jack Cafferty, he's got "The Cafferty File." Jack, terrible what's going on out there. In the midst of all of this, women suicide bombers.

JACK CAFFERTY, CNN ANCHOR: I know and there are concerns as well, less than two weeks now, before the start of the Olympic Games, Wolf, the air in Beijing heavy with a lot more than anticipation in advance of the upcoming summer games beginning on August 8th. Pollution in China's capital city is now reaching dangerous levels. Chinese state media reports if the air quality doesn't improve -- can we take this full screen - Just go ahead and take me out thereof and put it up full screen. You can't even see, look at this, you can barely see across the street.

If conditions don't improve, the Chinese government said it could pull up to 90 percent of the cars off the road in Beijing, shut down more factories. This comes after an air pollution control plan implemented over a week ago, which included pulling half the city's 3 million vehicles off the roads, closing factories in and around Beijing, and halting almost all construction.

Well so far as you can see, it hasn't worked very well. For the last five days, Beijing's air pollution index has failed to meet the standard for good air quality, with visibility reduced to several hundred yards. Just the kind of stuff you want your world's best athletes breathing while they're competing, especially in something like the 15,000 meters.

More than 10,000 athletes from around the world, hundreds of thousands of spectators, expected in the Chinese capital city for the games. Some teams, including the one from the United States, are offering optional breathing masks for the athletes. Pollution isn't the only issue plaguing the Beijing Games either. Secretary of State Condoleezza Rice warning the government of china not to use Olympic security as an excuse to crack down on dissent.

Chinese officials made several terror-related arrests, they insist the Olympics are being threatened by terrorists, but some are concerned that China, which hasn't presented much evidence in these crackdowns, is just going after people who disagree with them.

Most experts say the threat from terrorists at the Olympic Games is low.

And then there are the free speech activists and those focused on Tibet and Darfur who have gone after China ahead of the upcoming games.

So here is our question, in light of pollution in Beijing: Among other issues, was it a mistake to award the Olympic Games to China? Go to cnn.com/caffertyfile and post a comment on my blog. I mean, those pictures are horrifying, Wolf.

BLITZER: They certainly are and I hope our athletes, all of the athletes from around the world can deal with this, because this is really, really worrisome that they have to compete in these kinds of conditions. I hope somebody can clean it up between then, but I'm sort of not convinced, Jack, it's going to work. I don't know what you think.

CAFFERTY: No and if the government pulls 90 percent of the vehicles off the roads, how are you going to get anywhere there during the games?

BLITZER: Also a fair point. All right. Jack, thank you.

CAFFERTY: All right.

BLITZER: He's the world's most wanted terrorist but is Pakistan, the new government there doing everything it can to find Osama bin Laden? Some say no. I'll speak about that more with Pakistan's new prime minister. He's here in Washington and he'll be joining us in THE SITUATION ROOM this hour.

Plus, the Olympic symbol engulfed in flames. New disturbing video from a terrorist group as has officials on alert about a possible attack at the Olympics. You're going to see what we know.

And terror at 29,000 feet, investigators believe they know what may have caused the gaping hole in a jumbo jet, but here's the question -- could it happen on other planes? Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: For the second time in three days a Qantas flight had to make an emergency landing. Today it was a stuck landing gear door that was the problem.

Investigators think they may know what ripped a hole in the Qantas Boeing 747 at 29,000 feet on Friday. Let's get the latest from CNN's Deborah Feyerick. She is working on the story. What are they focusing in on now, Deb?

DEBORAH FEYERICK, CNN CORRESPONDENT: They're focusing on the oxygen cylinders and the right now Federal Aviation Administration is keeping a close eye on the investigation. Qantas is inspecting its fleet of 747s, about 30 in all but no expectations called for in the U.S. just yet. Investigators tend to be cautious. Because early suspicions can be wrong and nobody wants to make a change before they know the facts.

(BEGIN VIDEOTAPE) FEYERICK (voice-over): First, there was a loud explosion. Then the oxygen masks came down and passengers say the plane dropped.

UNIDENTIFIED MALE: I thought we were just going down into the sea so I was just stunned. I grabbed my passport out of my bag and put it in my pocket, so that if my body was found, they could identify it quicker.

FEYERICK: As investigators scoured the five-foot hole and damage for evidence, aviation safety authorities ordered Qantas to inspect all oxygen bottles on board its 747s.

PETER GIBSON, CIVIL AVIATION SAFETY AUTHORITY: We think it's prudent to put safety first, to get inspections done now, rather than waiting any longer.

FEYERICK: The plane from Hong Kong to Australia was forced to make an emergency landing in Manila Friday. Investigators don't know the cause but say an oxygen cylinder about five feet tall resembling a scuba tank near the front end of the plane is missing.

NEVILLE BLYTH, AUSTRALIAN TRANSPORT AND SAFETY BUREAU: Obviously looking for evidence of where that cylinder may have gone, for fragments of the cylinder, all of those types of engineering aspects.

FEYERICK: In may of this year the FAA ordered airlines to inspect brackets which secure oxygen cylinders on all Boeing 747s, to prevent the tanks from coming loose, leaking, and triggering a fire. But some say the cylinder itself may also have been defective.

GREG FEITH, FORMER NTSB INVESTIGATOR: The valve on top of the bottle could have failed. If it failed, then of course those bottles are pressurized to about 2,000 psi, so it becomes a very lethal weapon at that time. The other thing is, could something have struck it?

FEYERICK: The FAA is keeping a close eye on the investigation, a spokesman saying, quote, "If there is anything safety action we need to take, we will do so."

The 365 passengers and crew members landed safely, scared, but uninjured.

(END VIDEOTAPE)

FEYERICK (on camera): And the head of the Aviation Security in Australia says it will take several days to inspect all oxygen cylinders. Qantas is quoted saying the FAA directive applied only to three of its aircraft and that this plane was not among them. The other planes were fixed and Qantas actually has a very good safety record -- Wolf?

BLITZER: Are these kinds of oxygen tanks on all 747s?

FEYERICK: They are. The FAA requires oxygen tanks on all 747s for emergency oxygen for the flight deck, that's the cockpit area. Airlines have the option of using oxygen tanks that just compress oxygen or generators for the passengers but yes, they are required on all of the planes.

BLITZER: Deborah Feyerick working the story for us, thank you.

It's a year of big events which could make a big terror target. Federal authorities are stepping up their efforts to identify any new threats. Our homeland security correspondent Jeanne Meserve is working this story for us.

Jeanne, what are you learning?

JEANNE MESERVE, CNN CORRESPONDENT: Well, Wolf, there is a new acronym in Washington. POHA, period of heightened alert, and we are in one right now. Department of Homeland Security officials say because of the upcoming Olympic Games, the political conventions and the presidential election and transition, everyone in the department has been asked to amp up their focus and vigilance, though there is no specific credible intelligence indicating an attack is being planned.

There is a little known jihadist group in China making threats against the Olympics but there is disagreement about how seriously to take them.

(BEGIN VIDEOTAPE)

MESERVE (voice-over): In a recently-released video, the Olympic symbol is engulfed in flames opinion an explosion is superimposed on the image of a stadium and the leader of the Turkistan Islamic Party threatens to conduct violent military actions against the upcoming games.

TIP, which is believed to have links to al Qaeda, is fighting for a Muslim state in western china. It has claimed responsibility for several bombings in China, and while those claims have not been verified, its videos do show the construction of a truck bomb, and a martyr message. Intelcenter, a private intelligence firm that monitors terrorist groups, uncovered the videos and released them to the media. It says the threats should be taken seriously.

BEN VENZKE, INTELCENTER: We have video material of them conducting vehicular bombings, execution of security force members, attacks on security force convoys, and other types of operations, very much like we see groups in Iraq and Afghanistan.

MESERVE: U.S. intelligence officials describe TIP as dangerous, but question whether it has the capability to mount a spectacular attack on the Olympics in the face of a massive Chinese security operation. But as the 1996 bombing in Atlanta demonstrated, even a small device can have a huge impact when amplified by the prism of the Olympics. The TIP may be calculating that its threats, whether carried out or not, will be noticed.

VENZKE: Most people in the world are not aware of that there is a jihadist group operating in the Xingjian Province or anywhere in China so this is a chance to sort of elevate their profile.

(END VIDEOTAPE) MESERVE (on camera): In earlier statements the TIP threatened an attack with biological weapons, that is not repeated in their video and there is considerable doubt about their capability to do that -- Wolf?

BLITZER: Jeanne Meserve, working the story for us, thank you.

One hundred twenty feet below the streets of New York City, a massive project involving dynamite, hundreds of workers and one giant drill, while higher gas prices are putting new pressure on this.

And space tourism, the billionaire Richard Branson unveiling his new space plane. Check it out. That's coming up.

Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Let's check back with Carol, she's monitoring other important stories incoming to THE SITUATION ROOM. What's going on, Carol?

CAROL COSTELLO, CNN CORRESPONDENT: Well, Wolf, one in four U.S. bridges need repairs or upgrading at a cost of at least $140 billion. And that's if the work starts rite now. This according to a report from an association of state transportation officials. The report comes days before the first anniversary of the Minneapolis bridge collapse, which killed 13 people. The report says bridges that need to be fixed are still considered safe.

Good news or should I say better news about gas prices. The national average is back under $4 a gallon, as prices it's the pump fall 11 days in a row. AAA says the average price of a regular gallon of gas is now $3.95 a gallon, and that's the lowest we've paid since May. However, a year ago gas was $2.90. Along with this decrease, government data shows Americans are slamming the brakes on travel, driving some 10 billion fewer miles this May than one year ago. Of course people driving less means less money for the government to collect in gas taxes.

Billionaire Richard Branson can't wait to boldly go where not too many people have gone before and wants you to come along, for a price. Branson unveiled his new space plane in California's Mojave Desert today, it will launch a smaller, still-to-be-built rocket ship. More than 250 people already paid $200,000 to be one among the first wave of space tourists on Virgin Galactic. Two hundred thousand dollars, Wolf.

BLITZER: You wrote your check already yet, Carol? You wrote the check, right?

COSTELLO: It's in the mail.

BLITZER: Good, sounds like fun. All right. Thanks very much.

Is a key U.S. ally doing all it can in the fight against al Qaeda? That would be Pakistan. It says it needs more intelligence, better weapons but is it already wasting U.S. money? My exclusive interview with the new prime minister of Pakistan. He's here in THE SITUATION ROOM.

Also, the former White House press secretary, Scott McClellan, he's now raising eyebrows by suggesting his office over at the White House routinely sent talking points to Fox News commentators. Anything wrong with that?

And you thought the price of gas was high. Commuters take note, it costs about it $1 billion to build a subway line. We'll go below the ground to show you why. Stick around. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: To our viewers, you're in THE SITUATION ROOM.

Happening now: The U.S. takes aim at al Qaeda. But is its key ally in the war on terror, Pakistan helping to capture, helping to capture the al Qaeda leader Osama bin Laden or simply stalling? We'll talk about it with Pakistan's new prime minister, he's here for an exclusive interview in Washington.

Your tax dollars may be going down the drain, at least $40 million earmarked for a prison in Iraq. Why is it just a half finished building in the desert, is it going nowhere? And did the White House send Fox News commentators talking points? Scott McClellan, former White House press secretary makes that charge. We're watching it. We'll have a full report.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

Reports from Pakistan indicate that a top al Qaeda weapons expert has been killed in a missile strike by the United States on a building near the Afghan border. The U.S. had posted a $5 million reward for Abu Kabob al Masri, (ph) an expert in chemical and biological weapons. No comment yet from the U.S. military.

The attack came only hours before Pakistan's new prime minister met with President Bush over at the White House.

(BEGIN VIDEOTAPE)

BLITZER: And joining us now, the new prime minister of Pakistan, Yousuf Raza Gilani. Mr. Prime Minister, welcome to Washington.

PRIME MINISTER YOUSUF RAZA GILANI, PAKISTAN: Thank you so much.

BLITZER: A lot of people are depending on you right now and your new government in Pakistan to get the job done. As we're speaking, there are reports that the U.S. launched a missile strike against an al Qaeda terror target inside Pakistan earlier today and killed this suspect. What can you tell us about that?

GILANI: Actually, because I'm here, I wanted to collect more details but I have already talked to President Bush that there should be more cooperation on the intelligence side so that when there is a credible and actionable information given to us, we will hit ourselves.

BLITZER: Why don't they do that? Because the impression we get is that they don't trust you that you would get the job done. They think -- the U.S. thinks it needs to do it itself.

GILANI: Basically, Americans are a little impatient. Therefore, in future, I think we'll have more cooperation on the intelligence side and we'll do the job ourselves because...

BLITZER: Because this is a violation of Pakistani sovereignty.

GILANI: Certainly, yes. If it is proved like this, it is certainly, yes. But at the same time, we have our bilateral relations with the United States on most of the areas, in defense, in science and technology, in education, in health, in food and agriculture, and of course, we want to have more cooperation on the intelligence side.

BLITZER: What did President Bush say to you when you asked him about these reports of this missile strike against this al Qaeda target?

GILANI: In fact, I insisted President Bush because when I met him in Sharm el Sheikh a few months back...

BLITZER: In Egypt.

GILANI: ... in Egypt, and we did talk to each other, that this action should not be taken by United States.

BLITZER: But he defended the action today.

GILANI: I said it should not -- unilaterally should not be done, so we must have more cooperation with each other. And it's our job because we are fighting the war for ourselves.

BLITZER: Well, irrespective of the misunderstanding or the dispute, was it a successful operation, the killing of this al Qaeda target?

GILANI: (INAUDIBLE) we are collecting more details about it because there's a timing difference between Pakistan and the United States. And we're even holding the inquiry, and when we get more information, then I'll be in a position to let you know.

BLITZER: Fair enough. Here's what the Secretary of State Condoleezza Rice said on Friday. She said, "We understand that it's difficult. We understand that the Northwest Frontier area is difficult. But militants cannot be allowed to organize there and to plan there and to engage across the border. So yes, more needs to be done."

She's referring to your government, saying that you must do more in Pakistan to prevent the Taliban and al Qaeda from regrouping and crossing into Afghanistan, where they do incredible damage.

GILANI: Actually, the world doesn't understand that we have inherited about three million refugees from Afghanistan to Pakistan. And we have difficult terrain. We have a huge, long border. And we have set up about 900 to 1,000 posts, checkposts. And on the other side, the NATO has fixed about 100 posts.

BLITZER: But they say you could be doing a lot more.

GILANI: And -- and...

BLITZER: You hear it from the chairman of the Joint Chiefs of Staff, the secretary of defense, the secretary of state. Did President Bush today...

GILANI: Mr. Wolf...

BLITZER: ... ask to you do more?

GILANI: Mr. Wolf, I have to finish first...

BLITZER: Go ahead. Finish.

GILANI: ... because I was telling you, we also introduced our biometric system, through which, through the fingerprints, one can catch hold of the militants. But on the other side, they're not cooperating.

But at the same time, it is a challenge and it is a challenge for both of us. Even you can understand, for the last five years, they're fighting war. The war is not like an ordinary war. It's a guerrilla war. And so we are fighting the war, too, but for our own interests because I've lost my own leader, Benazir Bhutto, because of this terrorism and extremism. Therefore, we are against terrorism and extremism. And when Condoleezza Rice will be meeting me today, and when she meet, we will discuss in detail. And today, she was also available when we met the president.

BLITZER: Well, did the president ask you to do more?

GILANI: Certainly, because, definitely whatever, until and unless there are good results, nobody is satisfied like this. But at the same time, we both have to do more. Not only us, even the U.S. has to do more.

BLITZER: The U.S. has provided since 9/11 -- and the relationship with Pakistan changed as a result of that -- about $10 billion since then. And many members of Congress, among others, are saying the money has to be focused in on the war on terror and not used in terms of your own bilateral issues with India, for example. I want you to listen to what Senator Barack Obama, the Democratic presidential candidate, said yesterday. Listen to this.

(BEGIN VIDEO CLIP)

SEN. BARACK OBAMA (D-IL), PRESIDENTIAL CANDIDATE: If we are going to provide military assistance to Pakistan, we should at least expect that that money is effectively deployed to deal with what is the most important security threat that we face.

(END VIDEO CLIP)

BLITZER: He wants you to spend the more effectively from the security perspective.

GILANI: Yes, I have listened to Mr. Obama and I'll also be meeting Mr. Obama soon and...

BLITZER: On this visit?

GILANI: Maybe today or tomorrow I am meeting him, and we'll discuss in detail because whatever you have asked me a question, and whatever the concern is of the Congress, that certainly, they want the funds should be utilized very judiciously, but I think because I've taken over only three months back and the money was given to them five years back. And I don't know what was the priorities of the then government, and of course, now they are thinking of assisting Pakistan in a big way. But I assure the people of the United States and the Congress that everything would be spent very judiciously, and I have -- for the first time, after 1964, we have introduced even the defense budget in the parliament.

BLITZER: I guess most Americans want to know, is Pakistan, is the new government, the democratically-elected government of Pakistan, which you lead -- is it doing everything it possibly can to find, to capture, or to kill Osama bin Laden?

GILANI: Actually, my government is certainly is doing its best. There are two things. One is the will, the other is ability. We have the will. But at the same times, the militants are equipped with the most sophisticated weapons in the world, and therefore, we can't match that equipment and the training. Therefore, when the U.S. cooperation (SIC) more on the defense side, we'll be able to have more capabilities of fighting.

BLITZER: So what you're saying is you want more intelligence assistance from the United States.

GILANI: And even the sophisticated weapons, which we don't have at the moment, because when they're using FMs (ph) and they're sending messages, the militants, we don't have the equipments to stop them. That is creating a lot of problems for us because -- but the will is there. Therefore, I want to tell the world I've come with a message for prosperity, peace and partnership for the world in the United States, and that should be very, very clear. And my democratic government is taking every step to combat terrorism because we are fighting not a war for the United States, it's a war for Pakistan.

BLITZER: Prime Minister, as I said earlier, you've got a tough mission. We're counting on you. Good luck to you. Welcome to the United States.

GILANI: Thank you so much. A pleasure meeting you. BLITZER: Thank you.

GILANI: Thank you.

(END VIDEOTAPE)

BLITZER: It's being called a monument to waste, the building in Iraq that some say is $40 million of your tax money simply thrown away.

And millions of New Yorkers may not realize what's happening 120 feet beneath them, a massive project under way involving hundreds of workers, one giant drill and plenty of dynamite. We're taking you down there. Stay with us.

You're in "The Situation Room."

(COMMERCIAL BREAK)

BLITZER: From Pentagon auditors comes another story of your tax dollars at work, or not at work, $40 million spent on a prison in Iraq that was never finished, probably was never even needed.

Let's turn to our senior Pentagon correspondent, Jamie McIntyre. He's got the story for us. Forty million dollars, Jamie, simply down the drain?

JAMIE MCINTYRE, CNN SR. PENTAGON CORRESPONDENT: Well, Wolf, the sad thing is, these accounts are not all that unusual. It seems like every time the special inspector general for Iraq comes out with a report, it's filled with another jaw-dropping boondoggle, and this one is just the latest example.

(BEGIN VIDEOTAPE)

(voice-over): These photographs from the IG report show what has become a monument to waste in the desert 12 miles east of Baghdad, a prison project that fell so far behind and was beset by so many problems, the U.S. government pulled the plug on the project when it was only half done.

The prison was just one of 53 construction projects that Parsons of Pasadena, California, was supposed to build in Iraq for a total of $333 million. But Pentagon auditors found that $142 million, 43 percent, went to projects that, like the prison, were never finished. They cited millions of dollars in waste that are likely associated with incomplete, terminated and abandoned projects.

Take the Baghdad police academy, nearly done when another contractor had to be called in to correct shoddy work. But the plumbing was so bad, workers had to build a new building for showers and toilets, and expansion joints that were installed improperly simply could not be fixed.

Parsons complained the U.S. government misled the company, claiming it would be working in a permissive environment but that the reality was, almost every day, a security threat would stop or slow work. In fact, a fire station similar to this one it was supposed to build was abandoned after it was bombed twice during construction.

The auditors noted the failure to complete some of the work is understandable because of the unstable security environment, adding that in August of 2005, the site manager for one of Parsons's subcontractors was shot and killed in his office.

(END VIDEOTAPE)

(on camera): In a statement given to CNN, Parsons construction said, quote, "We did our very best under extraordinarily difficult circumstances."

Among the report's recommendations is that the U.S. government should get a better handle on the risk of violence before it gives out these contracts, and that maybe, Wolf, maybe it should hold off building things sometimes until security improves. It sounds a lot like common sense.

BLITZER: But doesn't it sound like common sense that the Iraqis now, who are awash with oil imports -- they have a lot of money, they have budget surpluses -- why aren't they paying to build their own prisons, their own police academies? Why are U.s. Taxpayers still paying for this work in Iraq?

MCINTYRE: Well, you know, they are paying for it now. The $20 billion that was allocated for these kinds of projects has pretty much run out. What the Pentagon auditors are doing is going back and seeing how that money has been spent. But the well is kind of running dry, and from now on, Iraq is going to have to have to fund most of its construction projects itself.

BLITZER: All right, Jamie. Thanks very much.

An Iowa town is taking center stage on a major and divisive issue of this, the presidential campaign. That would be illegal immigration. Busloads of protesters flocked to this small and usually quiet community of Postville (ph) this weekend.

Let's go to Mary Snow. She's working this story for us. All right, there's an uproar going on, Mary. What's it all about?

MARY SNOW, CNN CORRESPONDENT: Well, Wolf, what's at issue is the state of nearly 400 illegal immigrants. Now, some say what's happening to these illegal immigrants is inhumane. Others say they should face the consequences of coming into the U.S. illegally.

(BEGIN VIDEOTAPE)

UNIDENTIFIED FEMALE: No more raids!

UNIDENTIFIED MALE: No more raids!

UNIDENTIFIED FEMALE: No more raids! SNOW (voice-over): On one side, hundreds of demonstrators chanted "No More Raids." Countering them, protesters said illegal immigrants should go home.

UNIDENTIFIED MALE: USA!

UNIDENTIFIED FEMALE: USA!

UNIDENTIFIED MALE: USA!

SNOW: The small farm town of Postville, Iowa, is now a flashpoint in the debate over illegal immigration two months after federal agents raided this kosher meat-packing plant. During the raid, they arrested 389 illegal immigrants, most of them from Guatemala. Federal prosecutors say nearly two dozen workers who were rounded up were under the age of 18. Iowa's labor commissioner says he's investigating Agriprocessors for potential child labor violations, as well as abusive work conditions.

A member of the family that owns Agriprocessors faced cameras Sunday.

GETZEL RUBASHKIN, AGRIPROCESSORS: A lot of this stuff is allegations that have yet to be proven. A lot of the stuff is rumor, outright lies. And a lot of stuff out there is just floating around.

SNOW: But New Jersey congressman Albio Sires met with families involved in the raids.

REP. ALBIO SIRES (D), NEW JERSEY: I have to tell you, in all my years, this is the most shocking thing I have come across. You had to be there to see those people cry in front of you, the children crying, kids asking me, When is my father coming home?

SNOW: While members of Congress try to step in with some answers, a group opposing all illegal immigration says it wants the employers prosecuted but also wants to see the illegal immigrants pay a price.

IRA MEHLMAN, FEDERATION FOR AMERICAN IMMIGRATION: The penalty ought to be deportation for having been here illegally in the first place. And there are penalties -- it's, in fact, a felony to use false documents in the United States. So they have to be held accountable, as well.

SNOW: One union that's been trying to organize at Agriprocessors calls the plant the poster child of an immigration system that doesn't work.

MARK LAURITSEN, UNITED FOOD COMMERCIAL WORKERS UNION: What you have is you have rogue operators like Agriprocessors who go out and exploit this. So they're exploiting the broken immigration system.

(END VIDEOTAPE)

SNOW: Now, a number of government agencies are investigating. A spokesman for Agriprocessors e-mailed us a statement saying it's cooperating with all of the investigations and says it's conducting its own probe. It also says it does not hire underage workers -- Wolf.

BLITZER: Mary Snow is in New York working the story. Thank you.

Beneath the streets of Manhattan, they're drilling a massive tunnel right now at a price of $1 billion a mile. We're taking you deep underground, where few people ever go, to show you why.

And the former White House press secretary, Scott McClellan -- he says his office gave talking points to, quote, "helpful pundits at Fox News." Fox and the White House -- they're firing back. Howard Kurtz of CNN's "Reliable Sources" and "The Washington Post" -- he's looking into McClellan's charge. Stay with us.

You're in "The Situation Room."

(COMMERCIAL BREAK)

BLITZER: Deep underneath the concrete streets of New York City, workers are digging a huge, huge tunnel. Let's go to CNN's Jim Acosta. He's in New York with the latest on this massive project -- Jim.

JIM ACOSTA, CNN CORRESPONDENT: Wolf, with the high price of gas, now more than ever, subway and commuter railroad systems have to plan for the future. And in the Big Apple, that means digging one big tunnel.

(BEGIN VIDEOTAPE)

(voice-over): Walking down 16 flights of stairs, 120 feet below the streets of Manhattan, we boarded what looks like a train used by coal miners to soak in this massive undertaking. As Joe Traina with New York's Metropolitan Transit Authority explained to us, it's a project that got its start in the '70s. That's when the agency started building a rail tunnel under the East River, and then suddenly stopped when they ran out of money. It was dubbed "the tunnel to nowhere."

(on camera): So this tunnel that we're in right now connects to the "tunnel to nowhere"?

JOE TRAINA, CHIEF CONSTRUCTION ENGINEER: It will connect -- it does connect -- it will connect to the "tunnel to nowhere." Right now...

ACOSTA: It's going to take us somewhere.

TRAINA: It's going to take us somewhere.

ACOSTA (voice-over): Traina says American commuters should take note. It costs a lot more to build a tunnel now.

TRAINA: Now, to construct a subway, it's about a billion dollars a mile. When you wait a year on a project this expensive, the escalation alone...

ACOSTA: The price goes up.

TRAINA: ... goes up. You know, you can never take a chance that that's going to have a favorable outcome. You have to act now.

ACOSTA: We're standing under what is 51st Street, now making our way to 42nd Street. For those of you counting at home, that's around nine city blocks. But we're doing it in mud and muck.

(voice-over): That's where we met the sand hogs...

ROBERT BELLIDORA, "SAND HOG": I'd rather be down here than up there.

ACOSTA: ... the workers who blast out this rock with dynamite, work sand hogs have done for generations.

DAMON ORSULICH, "SAND HOG": Well, my father did it, my uncle. You know, it's a living.

ACOSTA: But sand hogs alone aren't enough. Meet the machine.

UNIDENTIFIED MALE: It operates just like a giant earthworm.

ACOSTA: A 360-foot steel earthworm so big, you can eat in it. A tiny control room guides the machine along its path without disturbing nearby subway lines, or as the MTA points out, some of the most expensive real estate in the world aboveground.

(END VIDEOTAPE)

(on camera) This tunnel is scheduled to be ready for passengers in the year 2015 at a price tag of over $7 billion. But here's the catch. It isn't fully funded. So if the commuters want it, they're going to have to pay for it -- Wolf.

BLITZER: Jim Acosta, deep beneath the streets of New York. Good report.

Let's go back to New York and Jack Cafferty. Can you imagine, Jack, what's going on, maybe right beneath where you are right now?

CAFFERTY: Well, that hole has been -- they've been doing this for 30 years underneath the city. I did local news here in New York for a lot of years, came to town 1977 and probably did our first report on the big hole under the city, which was originally a water tunnel in 1978. And it's 30 years later, and they don't have anything down there except this big hole that they've poured an awful lot of money into. And now the taxpayers are going to have to cough up some more money in order to get it done. It's like the projects in Iraq you were talking about earlier.

The question: In light of pollution in Beijing, among other issues, was it a mistake to award the Olympic games to China? Nathan writes from Chicago: "Not only was it a mistake, it's embarrassing to the people of China. I have a Chinese friend who confirms this. He says China has too much poverty to host the Olympics, plain and simple, without skimming over any of the other issues, told me that he's clueless as to why they were awarded the Olympic games."

Chad in Los Angeles: "Great pictures of the pollution in Beijing. Glad I don't have to go and breathe that air. But then again, I live in Los Angeles, so I get my fair share."

Debbie in Dallas -- Debbie in Dallas: No, no. "It wasn't a mistake for awarding the games to them, it was a mistake that China didn't work diligently to reduce issues such as the pollution and fix their human rights record before 2008. They have had years to make an impact, didn't they?"

Kyle in Dayton, Ohio: "Has China received any good publicity for these Olympic games? Horrible pollution, unbelievable government censorship are the keynote stories thus far. The Olympic games place China under a microscope, highlighting numerous issues that are continually disregarded by Chinese authorities. Maybe the Olympics will improve the life of the average Chinese person, something far greater than any sporting event."

My favorite letter, though, is this one. Buster in New York: "I don't know about you, Jack, but I'm really looking forward to the 2008 Olympics in Beijing. I can't wait to watch all the sprinters and long-distance runners flying around the track in their colorful hazmat suits, huffing and puffing through their state-of-the-art gas masks. But I have to admit the most interesting event will be the women's pole vaulting competition, where fabulously fit females will disappear up into the smog only to reappear with third-degree burns from the sulfuric acid atmosphere. Nothing beats holding the Olympics at a Superfund site."

If you didn't see your e-mail here, you can go to my blog at CNN.com/caffertyfile and look for yours there among hundreds of others.

You know, the last time I talked about China, I got in a lot of trouble.

BLITZER: Keep quiet right now, Jack.

CAFFERTY: OK!

(LAUGHTER)

BLITZER: That's it. Thank you.

He wrote a bombshell book, but former White House press secretary Scott McClellan isn't done yet. Now he's talking about the relationship between the Bush administration a major news network. Stand by for that. And John McCain has a growth removed from near his temple. What might this mean, if anything, for his president campaign? Stick around.

You're in "The Situation Room."

(COMMERCIAL BREAK)

BLITZER: Former White House press secretary Scott McClellan is making waves once again, saying his office provided talking points to pundits it viewed as friendly. That has the White House and Fox News firing right back. CNN's Howard Kurtz has the story -- Howie.

HOWARD KURTZ, HOST, CNN'S "RELIABLE SOURCE": Wolf, it's no secret that the Bush White House has enjoyed a close working relationship with Fox News, but is there more to that relationship than meets the eye?

(BEGIN VIDEOTAPE)

(voice-over): Former presidential spokesman Scott McClellan kicked up a fuss the other day by saying his press office routinely sent talking points to Fox commentators who might help carry the administration's message, but not the network's reporters.

SCOTT MCCLELLAN, FORMER BUSH WHITE HOUSE PRESS SECRETARY: Certainly, there were commentators and other pundits at Fox News that were helpful to the White House.

CHRIS MATTHEWS, HOST, MSNBC "HARDBALL": Did you use...

(CROSSTALK)

MCCLELLAN: Certainly, yes. Certainly, we got talking points to those people.

MATTHEWS: Did people say, Call Sean, call Bill, call whoever? Did you do that as a regular thing?

MCCLELLAN: Certainly. It wasn't necessarily something I was doing, but it was something that we at the White House, yes, were doing, in getting them talking points and making sure they knew where we were coming from.

KURTZ (voice-over): But were these written talking points or just the usual PR statements? Were they whispered instructions or the kind of background conversations that journalists of all stripes have with administration and campaign officials?

JIM GERAGHTY, "NATIONAL REVIEW": I guess the question is, Do you see a talking point as an instruction, as this is what you're supposed to say, or do you see it as, This is our argument. This is how we see the issue. This is our perspective. If you want to make that argument, go ahead.

KURTZ: President Bush has invited conservative columnists and radio talk show hosts, including Fox's Sean Hannity, for briefings at the White House. But President Clinton sometimes called to chat with liberal columnists, such as "The Washington Post's" E.J. Dionne.

MCCLELLAN: I think everybody in this town uses people that are going to be helpful to their cause to try to shape the narrative...

MATTHEWS: But a whole network?

MCCLELLAN: ... to their advantage.

KURTZ: White House spokeswoman Dana Perino said today she isn't sure what McClellan, who sharply criticized the administration in a recent book, is talking about. Perino says, "We regularly send out information about our policies and our positions and reactions to events, as does every other press secretary in Washington. And often those communications or communications are in response to queries from the press."

On his radio show today, Fox's Bill O'Reilly flatly denied McClellan's account.

BILL O'REILLY, HOST, FOX'S "O'REILLY FACTOR": I never got a talking point in my life from anybody, and McClellan's lying. OK, Scott? I'm calling you a liar. Got it? And lost all respect for you.

(END VIDEOTAPE)

KURTZ: Fox executives tell me McClellan's accusation is ludicrous, and while Fox commentators like Hannity generally side with the Bush administration, they are sometimes critical, as well -- Wolf.

BLITZER: Howie, thanks very much. We tried reaching Scott McClellan several times today to get his response. He wasn't available. We'll keep on trying to find him.

And to our viewers, you're in THE SITUATION ROOM.