(Updates with quote)

By Mussab Al-Khairalla

BAGHDAD, Jan 12 (Reuters) - Iraq's parliament passed a law on Saturday to ease restrictions on mostly Sunni Arab members of Saddam Hussein's Baath party returning to public life, one of the main political benchmarks set by the United States.

Washington has been pressing Iraq's Shi'ite Islamist-led government to pass the law in an effort to draw the minority Sunni Arab community that held sway under Saddam closer into the political process.

"The law has been passed. We see it as a very good sign of progress and it will greatly benefit Baathists. It was passed smoothly and opposition was small," said Rasheed al-Azzawi, a Sunni member of the committee which helped modify some of the language of the law.

The Accountability and Justice bill replaces the De-Baathification law, which Sunnis have long complained amounted to collective punishment against their sect.

The new law will allow thousands of former party members to apply for reinstatement in the civil service and military, while pensions will be given to a smaller group of more senior members still banned from public life.

The previous law set up a committee tasked with purging senior Baath Party members from government and tightly restricted the employment of junior party members.

Thousands of Iraqis, most of them Sunnis, were fired from government jobs after Saddam was toppled in the U.S.-led invasion in 2003, fuelling a long-running insurgency against Iraq's new Shi'ite rulers and U.S. forces.

While support for the insurgency has waned following a rebellion by Sunni tribes against Sunni Islamist al Qaeda, there is still a deep sectarian divide between Sunnis and Shi'ites. U.S. officials hope the new law will go some way towards easing that mistrust.

(Writing by Ross Colvin; Editing by Ibon Villelabeitia)

AlertNet news is provided by