Iraqi government leaders have rejected a draft law paving the way for provincial elections, a setback for the process of reconciling Iraqi factions.
The legislation will now be sent back to parliament, which passed it earlier this month after weeks of delays.
The Iraqi presidential council, made up of the president - a Kurd - and Shia and Sunni vice-presidents, said there had been "no agreement" on the measure.
But the three leaders backed the budget and an amnesty law for detainees.
The three laws were approved together as a package on 13 February, after a period of brinkmanship and sectarian wrangling.
The passing of the rejected law, which defines the relationship between Baghdad and local authorities, was the second of 18 benchmarks set by Washington as targets in the process of political reconciliation.
"We believe that the Iraqis will be able to work it out," said White House spokeswoman Dana Perino.
"While we would have liked to have it go forward without any complications, this is democracy at work," she said.
The presidential council is made up of President Jalal Talabani, Shia Vice President Adel Abdul-Mahdi and Sunni Vice President Tariq al-Hashemi.
The 2008 budget and the amnesty measures will now become law.
The $48bn state budget financed mainly through oil revenues was meant to have been agreed before the end of last year.
The amnesty bill will benefit many of an estimated 25,000 detainees held in US and Iraqi prisons, if they have not been charged with or convicted of violent crimes.
A large proportion of detainees are thought to be suspected Sunni Arab insurgents who are held without being charged.
Correspondents say that as the Kurds had wanted the budget to be passed, the Sunni Arabs wanted the amnesty law, and the Shia Muslims were keen to press ahead with provincial elections, passing the laws together had pleased all three groups.
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