The scandal, which reinforces the picture of an error-prone administration, comes on top of bad publicity over the President's dollars 200 ( pounds 130) haircut on Air Force One, which delayed traffic at Los Angeles international airport, and continuing doubts over his Bosnian policy.
It began when seven travel staff members lost their jobs last week. The White House said an audit had revealed poor record-keeping and missing funds, and it portrayed the dismissals as part of Mr Clinton's drive for more honesty and efficiency in government.
But internal White House memos revealed that friends and aides of the President had been lobbying for the dollars 20m-a-year business ever since he came into office. Catherine Cornelius, a 25-year-old cousin, had written a memo in February suggesting that she head a reorganised White House travel office.
After three days of embarrassing revelations about the background to the sackings, the White House yesterday dropped plans to appoint the new company, World Wide Travel of Little Rock, Arkansas, to handle the travel arrangements of the press corps covering the President.
'World Wide's decision to withdraw should end any possible perception that its selection to provide interim White House services was based on a prior personal or business relationship with members of the campaign staff who now work at the White House,' said a statement issued by George Stephanopoulos, the chief White House spokesman.
The agency had been replaced by American Express Travel, the White House said.
But Mr Clinton's aides had already managed to give the impression that their real aim was to hand over a piece of profitable business to friends of the President. The disclosures are damaging to an administration that is increasingly portrayed in the US media as incompetent and ineffective. The Senate Republican leader Bob Dole said people wanted 'answers to what they see as real conflicts of interest, real perception problems, real appearances of impropriety, and possibly some real sleaze'.
The White House tried to defend itself with a statement from the FBI that there were grounds for a criminal investigation of the old travel office.
FBI officials are privately complaining, however, that this is an attempt by the White House to get off the hook.
Senator Christopher Bond, a Missouri Republican, said yesterday that Congress should investigate the travel office firings, and he vowed to oppose dollars 11.8m for White House telephone and computer system upgrades, which the administration is seeking this year in a supplemental spending bill. 'I must say, I am concerned about the developing pattern of experienced public servants being fired to make room for young political appointees,' Mr Bond said.
The owner of World Wide Travel gave dollars 1,755 to Mr Clinton's presidential campaign, and the company served as the campaign's travel agency, receiving well over dollars 1m. The agency also was a client of the White House management chief, David Watkins, when he was in the advertising business.
In addition to damaging already strained relations between Mr Clinton and the White House press corps, many of which had friends in the old travel office, the scandal reinforces the impression of an administration that is adrift.
So did the case of the presidential haircut. Last week, two of Los Angeles airport's runways had to be closed while the President had his hair cut on board Air Force One as the presidential jet sat on the tarmac.
The cut was done by Christophe, Beverly Hills hairdresser to the rich and famous. As he worked, full security measures remained in force around the plane and several incoming flights were delayed. The incident did further damage to Mr Clinton's image as a man of the people, so carefully cultivated during the election campaign.
Mr Clinton has also been hurt by the slow disintegration of his economic package in the face of Republican resistance, and his failure to develop an effective US policy in Bosnia, his first serious foreign policy test.
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