UPDATE 3-U.S inspector faults federal agents in gun probe, clears Holder

WASHINGTON, Sept 19 (Reuters) - The U.S. Justice Department's internal watchdog faulted 14 federal agents and prosecutors on Wednesday for the botched anti-gun-trafficking effort known as "Operation Fast and Furious" but cleared Attorney General Eric Holder of any wrongdoing.

The report by the department's inspector general, Michael E. Horowitz, prompted two senior officials to leave the government.

Congressional Republicans investigating the mismanaged operation had accused Holder of covering it up. A report bolstering their claim would have been an embarrassment for President Barack Obama, who appointed Holder to his job, in the home stretch of the presidential campaign.

One U.S. agent was killed in Arizona, and two guns connected with the case were found at the scene of the shootout where he died.

The new report found screw-ups of "systemic" scope that risked public safety but no cover-up.

That, and a statement supportive of the report from Holder's main Republican accuser, Representative Darrell Issa, seems likely to defuse what could have been a politically explosive conclusion to the probe.

Two senior department officials left the government as the report was made public. Kenneth Melson, former head of the U.S. agency that enforces gun laws, retired, while Jason Weinstein, responsible for oversight of many criminal-related matters, resigned.

The highest-ranking person criticized, Lanny Breuer, the assistant attorney general in charge of criminal prosecutions, has been "admonished," said a department official.

The book-length, 471-page report is the most in-depth look yet at Operation Fast and Furious. It follows a 19-month review by the department watchdog that had access to non-public documents.

Fast and Furious began in 2009 as an effort to stop the flow of firearms from Arizona to Mexican drug cartels. As U.S. agents tried to build an expansive case, they did not pursue low-level gun buyers who bought about 2,000 potentially illegal firearms and trafficked many of them across the border.

The operation raised the fury of U.S. gun owners, who are an important Republican constituency and who helped to drive attention to Fast and Furious in Congress and the media.

The new report said that Melson and Weinstein failed to ask detailed questions about the tactics in Fast and Furious, allowing the operation to go on in 2010 when they could have stopped it.

'SPECULATIVE ASSUMPTIONS'

Melson said in a statement that he disagrees with parts of the report but added in a statement that he was "ultimately responsible for the actions of each employee."

Melson was pushed out in August 2011 as acting director of the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) and recently worked on forensic policy for the department.

Weinstein wrote in a blistering resignation letter that the inspector general's conclusion about him is "completely false."

The report said Breuer, Weinstein's boss, should have alerted his superiors, including Holder, in 2010 to flaws in a program similar to Fast and Furious that was started during George W. Bush's presidency.

The nature of any disciplinary action and whether any is taken is up to the Justice Department. A department official said no further shake-ups are expected.

VINDICATION FOR HOLDER

Holder pointed to the inspector general's report, which he requested in February 2011, as vindication.

"It is unfortunate that some were so quick to make baseless accusations before they possessed the facts about these operations - accusations that turned out to be without foundation and that have caused a great deal of unnecessary harm and confusion," he said in a statement.

In a rare show of agreement, Issa, the Republican who has led a congressional inquiry into Fast and Furious, also found reason to praise the inspector general's report. Issa said it confirms the operation's "near total disregard for public safety."

Fast and Furious came to light after the December 2010 shooting death of a U.S. Border Patrol agent, Brian Terry. Two guns that firearms agents attempted to track were found at the scene of Terry's death in rural Arizona.

Terry's family was pleased that Wednesday's report documented systematic failures, family spokesman Robert Heyer said in a statement.

But Heyer said the family was disappointed by Holder's statement praising Melson and Weinstein upon their departures. "The focus today should not be on political spin control ... but rather on the gross negligence of the department," he said.

There were no indictments of gun buyers in Fast and Furious until after Terry's death, when ATF agents decided to bring an end to the operation. Two men are now in custody in Terry's death.

AGENTS CONCEIVED PLAN

The inspector general's report describes a series of mishaps, mischaracterizations and misleading statements that kept those in charge at the Justice Department from knowing all the relevant facts.

No federal agents or prosecutors in Arizona raised a serious question about allowing the purchase of firearms to continue for months, the inspector general said.

"This failure reflected a significant lack of oversight and urgency by both ATF and the U.S. Attorney's Office, and a disregard by both for the safety of individuals in the United States and Mexico," the report said.

But that failure was compounded by a lack of oversight at headquarters in Washington at both the Justice Department and the ATF, the report said.

After one January 2010 briefing at headquarters at which agents described the number of guns involved, ATF officials did not take any action to closely monitor the investigation or assess the risks involved, the report said.

The report pins blame on Arizona-based agents and Justice officials in Washington for an inaccurate letter sent to Congress on Feb. 4, 2011, which denied that potentially illegal guns were allowed to be sold.

The report said the department, in preparing the letter, relied in part on Dennis Burke, who would later resign as the U.S. attorney in Arizona. But the report said Burke was "an unreliable source of information" about Fast and Furious, while Weinstein "advocated" for agents rather than examining their information skeptically, the report said.

The Justice Department was forced to retract the letter 10 months after sending it, intensifying congressional interest in the operation. Issa's committee issued a subpoena for documents related to the letter. When the Obama administration refused to comply on grounds of executive privilege, the Republican-controlled House of Representatives cited Holder for contempt of Congress.

The document dispute is pending in a federal court in Washington.

ATF Acting Director B. Todd Jones said in a briefing with reporters that Wednesday was a "sad day" and that the bureau "fully accepts" responsibility for the mistakes made in the operation.