The Bush administration is not prepared to impose economic sanctions on Iraq at this point but won't rule out that possibility in the future, a State Department official said Thursday.

John H. Kelly, assistant secretary of state, acknowledged on Capitol Hill that there are serious strains in relations between Washington and Baghdad.Nonetheless, he said, officials believe Iraqi President Saddam Hussein might change his ways.

There is a "possibility of improvement, and we want to encourage that improvement," Mr. Kelly said.

Mr. Kelly ran into tough questioning from several members of Congress who demanded to know why the Bush administration has not responded to a number of Iraqi actions that they said violate human rights and appropriate behavior of nations.

Among other things, they cited Mr. Hussein's use of chemical weapons that killed some 5,000 Kurds in his country a year and a half ago.

"There is an Alice-in-Wonderland element in your testimony," Rep. Tom Lantos, D-Calif., told Mr. Kelly. "At what point will the United States recognize that Saddam Hussein is not a nice guy?"

Rep. Howard Berman, D-Calif., has introduced legislation that would impose economic sanctions on Iraq by banning agricultural credits and the sale of dual-use items such as computers that can be used for military as well as peaceful purposes.