WASHINGTON – Al-Qaida in Iraq is increasingly embracing extortion and kidnapping to finance its operations as cash carried in by its dwindling foreign fighter network is drying up, according to U.S. intelligence and documents captured in Iraq.

Al-Qaida in Iraq’s funding scheme could drive an even deeper wedge between the terrorist organization and the Iraqi tribes and others who once joined forces against the U.S.-led invasion and occupation.

The smuggling network that funnels foreign fighters and weapons into Iraq has been under increasing pressure in the past year, squeezed from three sides: by Iraqi tribes, who, repelled by the violence, are making it increasingly difficult for terrorist networks to operate and hide among them; by more effective U.S. and Iraqi military operations, and by governments in the region – notably Saudi Arabia and Morocco – that are cracking down on al-Qaida and the smuggling networks that feed the insurgency.

The flow of foreign fighters into Iraq has been cut to an estimated 20 a month, a senior U.S. military intelligence official said. That’s a 50 percent decline from six months ago, and just a fifth of the estimated 100 foreign fighters who were infiltrating Iraq a year ago, according to the official, speaking on condition of anonymity in order to discuss intelligence reports.

Ninety percent of the foreign fighters enter through Syria, according to U.S. intelligence. Foreigners are some of the most deadly fighters in Iraq, trained in bomb-making and with small-arms expertise and more likely to be willing suicide bombers than Iraqis.

Foreign fighters toting cash have been al-Qaida in Iraq’s chief source of income. They contributed more than 70 percent of operating budgets in one sector in Iraq, according to documents captured in September 2007 on the Syrian border.

The more than 500 pages of al-Qaida in Iraq papers gave a snapshot into at least one of the several smuggling networks that has brought thousands of foreigners into the country over the past five years. The Combating Terrorism Center at the U.S. Military Academy has issued five reports on the documents, the latest focusing on funding and the entry and egress of outside fighters. Most were conveyed through professional smuggling networks, according to the report.

As income had dried up from foreign fighters, the group has in the past two years adopted criminal tactics against Iraqis to raise money – carjackings, kidnappings for ransom, hijacking fuel trucks, counterfeiting and demanding protection money of local businesses, the senior official told The Associated Press. Al-Qaida in Iraq’s total budget is unclear, the official said.

“A year or two ago they were able to receive funds from couriers from the greater al-Qaida organization. A lot of that outside access has been cut off,” the official said. “Most of the funding for al-Qaida in Iraq is now internally generated.”

The official added that as Iraq becomes more secure and the economy improves, al-Qaida in Iraq, ironically, has more wealthy Iraqis from which to extort money.

Acting on tips from locals and other intelligence, he said U.S. and Iraqi forces are capturing or killing one or two key Iraqi insurgent leaders every week, many of whom are responsible for receiving and moving foreign fighters around Iraq. This further drains the terrorist organization of both people and money.

But U.S. intelligence officials are struggling with a chicken-and-egg question: Is the foreign fighter flow into Iraq tapering off because of a strategic decision by Osama bin Laden’s al-Qaida organization to shift its focus, or is it a tactical reaction to a string of setbacks in Iraq, the premier battlefield for terrorists looking to take on the United States?

“We do think they are considering what should be the main effort,” Gen. David Petraeus, the top American commander in Iraq, said in an interview with the AP on July 19.

Iraq for several years has been the central battlefield between U.S. forces and al-Qaida-affiliated terrorists. But in recent months violence in Afghanistan and Pakistan has increased relative to Iraq. It is unclear whether al-Qaida has consciously decided to change its focus, or whether the shift was forced by U.S. success against the Iraqi insurgency in the past year.

That question was the subject of a videoteleconference last week between U.S. military and intelligence community analysts in Iraq and Afghanistan who confer routinely to determine whether and how one war affects the other.

They know this: Foreign fighters are not being moved out of Iraq to fight in Afghanistan, the official said. But it appears fresh recruits are being moved into Afghanistan, Pakistan, Saudi Arabia and North Africa at increasing rates. They may have more freedom to operate because the terrain is difficult, and fewer U.S. and allied troops are there.