Paul Wolfowitz, the embattled president of the World Bank, has indicated for the first time that he could step down from his post but said he would not submit to a "smear campaign" he claims has been mounted against him.

The change in stance suggests that a compromise deal could be reached, under which the World Bank board refrains from ruling that Mr Wolfowitz breached ethics rules by pushing through a large payrise for his girlfreind, also a bank employee, in return for his resignantion.

Mr Wolfowitz, who has insisted that a tax-free $60,000 (£30,000) pay rise and promotion awarded to Shaha Ali Riza was sanctioned by the World Bank's ethics committee, told an investigatory panel that he would "not resign in the face of a plainly bogus charge of conflict of interest".

However, he added: "Only when the cloud of these unfair and untrue charges is removed, will it be truly possible to determine objectively whether I can be an effective leader of the World Bank."

Opponents have argued that his position has become untenable, not least because Mr Wolfowitz has championed a controversial crack-down on corruption in countries to which the World Bank lends money for development projects.

Dismissing those concerns, Mr Wolfowitz told the panel that he was the victim of a “smear campaign” aimed at forcing him to resign.

At the same time, President Bush renewed his support for the former Pentagon official, saying he thought that the World Bank chief “ought to stay” in his post. The appointment of the Bank president has traditionally been made by the US, the organisation's largest donor.

However, although the US is the largest shareholder at the bank, it still has only 16 per cent of the votes on the board. The EU’s combined total is twice that, though it is still not certain they would all vote for Mr Wolfowitz’s removal.

The investigatory panel, drawn from the organisation's board of 24 representatives, is examining not just the Riza affair, but also Wolfowitz’s hiring of former White House aides to influential, and highly paid, jobs in his inner circle.

A report in the Washington Post over the weekend said that the bank panel had already concluded that Mr Wolfowitz breached ethics in engineering the pay raise for Ms Riza, but remained locked in debate over whether to call explicitly for his resignation.

Mr Wolfowitz said: “The goal of this smear campaign, I believe, is to create a self-fulfilling prophecy that I am an ineffective leader and must step down for that reason alone.

“I, for one, will not give into such tactics. And, I will not resign in the face of a plainly bogus charge of conflict of interest."

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