The world's most populous Muslim nation was praised on Wednesday by US President George W. Bush for supporting the war on terror, but he told Indonesia that Islamic extremists had defiled a great religion.

But Bush ran afoul of leading moderate Muslim clerics during talks on the Indonesian resort island of Bali, where Islamic militants linked to al Qaeda blew up two nightclubs packed with foreign holidaymakers just over a year ago, killing 202 people.

Reflecting growing mistrust of the United States among ordinary Indonesians, the clerics criticised Washington for supporting Israel over the Palestinians and for the occupation of Iraq.

They said Bush needed to listen more to the opinions of the rest of the world.

Bush, speaking against the backdrop of a palm-fringed beach and turquoise sea, expressed his gratitude to Indonesia after meeting President Megawati Sukarnoputri and the clerics.

"We know that Islam is fully compatible with liberty and tolerance and progress because we see the proof in your country and in our own," he told a news conference.

"Terrorists who claim Islam as their inspiration defile one of the world's greatest faiths. Murder has no place in any religious tradition. It must find no home in Indonesia."

US officials said Bush wanted to correct what he felt was a misconception that the war on terror was a cover for a war against Islam.

Bush paid the brief visit to Bali under blanket security before flying to the Australian capital Canberra for talks with key ally Prime Minister John Howard as part of a six-nation tour.

He paid tribute to the victims of the Bali bombings, the worst global act of terror since the September 11, 2001, hijack attacks on the United States.

WARSHIPS, SNIFFER DOGS, BOMB SQUADS

Indonesia took no chances with security, deploying seven warships along with 5,000 heavily armed police and troops backed up by sniffer dogs and bomb squad units.

Bush hoped his visit would help dampen anti-Americanism in Indonesia. Megawati told the news conference she attached "great importance" to Jakarta's relationship with the United States.

But the Muslim clerics told Bush that US policies in the Middle East were one of the root causes of terror attacks.

"We told him US foreign policy should seek a new paradigm if the US wants to be respected by the world community and be safe," Syafii Maarif, head of the second-largest Muslim group in Indonesia, Muhammadiyah, told Reuters.

Maarif said he told Bush his policies toward Israel were "extraordinary" and his fear of terrorists "excessive".

Asked about the apparent bias toward Israel, the Muslim leaders quoted Bush as saying" "Our foreign policy is for development of a Palestinian state that lives side by side with Israel in peace...(I was) the first president to ever articulate that position, and I still believe it is possible.

"In order to achieve a Palestinian state living side by side in peace there needs to be leadership willing to fight off the terror that is trying to prevent the state from emerging."

In a joint statement issued by the two countries after the meeting they expressed "deep concern" over Israeli-Palestinian violence and "strong support for the vision...of an independent, sovereign and viable Palestinian state".

Bush said he would propose to Congress a six-year programme worth $157 million to support basic education in Indonesia to aid efforts to build a system that discourages extremism.

While Indonesia's secular government has been allied to the United States in its efforts to fight terror, critics have accused it of failing to explain the dangers of radical Islam to its people and to tackle militancy at its roots, especially in a small number of conservative Muslim boarding schools.

In Jakarta, some 500 people held a peaceful protest against Bush's visit. There were small protests in two other cities.

Bush's praise for Indonesia's role in the war on terror is in marked contrast to the accusations of foot-dragging prior to the Bali blasts. Washington had warned Megawati for months that her country could face deadly attacks.

After the Bali bombings, Indonesia cracked down on Islamic militancy, particularly members of Southeast Asia's Jemaah Islamiah group blamed for the attack. It has arrested 100 militants since the Bali bombings over that attack and others.

The US-Indonesian statement issued after the meeting said Bush also praised Megawati's "commitment to continue to press forward with difficult economic reforms, combat graft, and improve the investment climate".

And on a sensitive area of relations, the statement said: "The two presidents agreed that normal military relations are in the interest of both countries and agreed to continue working toward that objective."

Washington suspended most military ties after allegations of Indonesian human rights violations surrounding the break by the tiny territory of East Timor from Jakarta in 1999.

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