UNITED NATIONS (CNN) -- Secretary-General Kofi Annan has approved Iraq's new $2.7 billion plan detailing how it would spend funds distributed under the latest U.N. "oil-for-food" program.

The plan authorized on Friday would provide badly needed food, medicine, clean water and industrial spare parts, while Iraq sells $3.7 billion worth of oil over the next six months to pay for the supplies.

However, because of falling crude prices, a shortfall is probable. Baghdad sold about $3 billion in oil over the past six months. It is allowed to sell up to nearly $5.3 billion worth of oil every six months to pay for supplies.

Of the $3.7 billion in projected oil sales, some $2.7 billion is to be used to purchase the humanitarian goods. The remainder is deducted for compensation to Gulf War victims in Kuwait and other costs.

The oil-for-food program, which began in December 1996, is an exception to stringent sanctions imposed on Iraq after it invaded Kuwait in August 1990. The program allows Baghdad to buy goods for its people and import some equipment for basic infrastructure repairs.

U.N. spokesman Fred Eckhard said Annan had informed the Security Council, which renewed the oil-for-food program for another six months on November 24, "he has approved, as revised, the distribution plan submitted by Iraq."

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About 1 billion is earmarked for food, including a $150 million increase proposed by the United Nations so the Iraqi government could provide 2,150 calories per person a day.

Other allocations include $240 million for medicines and medical equipment; $150 million for water and sanitation; $409 million for electricity projects plus $300 million for spare parts to upgrade the country's dilapidated oil industry.

But Benon Sevan, executive director of the program, turned down Iraq's request to improve its telecommunications system, saying Baghdad had not answered an October 30 letter requesting information on the subject.

Annan's endorsement also excluded $20 million to upgrade Iraq's banking system, a new item Baghdad had not previously discussed with the United Nations, according to a letter Sevan sent to Iraq's outgoing U.N. ambassador Nizar Hamdoon.

Delays or disagreements on the distribution plan in the past had prompted Baghdad to stop oil flows. But the transition in late November from one phase of the program to another went smoothly, without any halt in oil sales.

Meanwhile, U.N. weapons inspectors in Iraq carried out searches again Friday, despite a dispute with authorities over entry to an office of the ruling party.

Gen. Hossam Mohammed Amin, who runs the National Monitoring Directorate, said three U.N. teams "carried out 14 surprise visits to sites," the official Iraqi News Agency reported.

The inspectors must certify that Iraq has dismantled its chemical, biological and nuclear programs and long-range missiles.

Until then, the U.N. Security Council will not lift an oil embargo and other sanctions it imposed.

U.S. Secretary of State Madeleine Albright warned Iraq on Friday that if it did not honor its promise to cooperate with U.N. inspectors, "the military option remains on the table."

The Associated Press and Reuters contributed to this report.