Zarqawi's Islamic militant group has claimed responsibility for inflicting Australia's first casualties in Iraq as well as the weekend massacre of 49 new Iraqi soldiers and their three civilian drivers.

Elsewhere, two roadside bombs in Baquba, northeast of the capital, killed an Iraqi policeman and wounded seven other people on Tuesday, while a local official and his guard were shot dead.

The US military said it bombed a rebel safe house in the northeast of Fallujah in the hunt for the Jordanian-born Zarqawi and his followers who are believed to use the Sunni Muslim city as an operating base.

"Multiple sources reported that a known associate of the Zarqawi network was present at the time of the strike," the army said in a statement.

Hospital sources reported no casualties, however, while witnesses said five empty houses were targeted in the bombardment.

US and Iraqi forces have set their sights on handing over control of Fallujah, west of Baghdad, to the interim Iraqi government ahead of national elections promised by January.

A joint US-Iraqi force of about 1,000 has surrounded Fallujah for almost two weeks as US warplanes pound suspected Zarqawi hideouts on a near daily basis.

The aerial bombardments and threat of an all-out military offensive, however, have prompted many residents to flee the city and raised concerns among humanitarian organisations for the welfare of those who stay behind.

Meanwhile, the scandal over 350 tonnes of high explosives lost or looted shortly after last year's US-led invasion rumbled on.

It moved to centre-stage of the US presidential election race with barely a week to go, as Democrat challenger John Kerry condemned what he called a "great blunder" by the administration.

Kerry pounced on reports by the International Atomic Energy Agencythat 350 metric tonnes of explosives had vanished from an unguarded military site shortly after the invasion.

In a political bombshell which injected new bile into the election, the nuclear watchdog said the material could be used in conventional bombs or to trigger an explosion in a nuclear device.

"After being warned about the danger of major stockpiles of explosives in Iraq this president failed to guard those stockpiles," said Kerry.

"This is one of the great blunders of Iraq, one of the great blunders of this administration, he said, adding that "incredible incompetence" by Bush had put US troops and the United States at great risk.

The White House tried to play down the loss, saying Bush had known about the situation for only 10 days.

His spokesman Scott McClellan blamed the disappearance on "some looting that went on in Iraq toward the end of Operation Iraqi Freedom, or during and toward the end of Operation Iraqi Freedom".

"The first priority, from our standpoint, was to make sure that this wasn't a nuclear proliferation risk, which it is not," McClellan told reporters.

In Australia's first casualties of the Iraq conflict, a car bomb exploded Monday in Baghdad as an Australian convoy drove by, killing three Iraqis and wounding 16 other people, incuding three Australian soldiers.

An investigation has been ordered into whether the media was tipped off before the bombing, Australia's Foreign Minister Alexander Downer said.

Estonia, another member of the US-led coalition, also came under fire, losing its second soldier in Iraq to a roadside bomb blast that wounded five others Monday in the west of the Iraqi capital.

Adding to the death count, unknown attackers in the restive city of Baquba shot dead Hehma Abed Saleh, a member of Diyala provincial council, as he drove past in a car, a second council member said. A guard was also killed.

In the southwest of the city, a policeman was killed and seven other people wounded in two roadside bombs.

"We were patroling along the road to Diyala university when the first bomb exploded, causing a number of victims among the police," said Lieutenant Moqdad Abed Hassan.

"We were rushing to the hospital when a second bomb exploded one kilometre (less than a mile) away," he said, adding that those injured in the later blast had been civilian passers-by.

Diyala province is where 52 army recruits and drivers were gunned down execution-style on Saturday in an attack that has sparked questions about whether the perpetrators received inside help by infiltrating the security forces.

The defence ministry said Tuesday that "these cowardly and treacherous actions will not stop our fighters of the courageous army from carrying on to purify the soil of Iraq from the criminal and terrorist groups".