The timing was hardly coincidental. On Sept. 10, 2002, one day before the first anniversary of the 9/11 terrorist attacks, police near Hamburg, Germany, staged a dramatic raid on a Syrian-owned company suspected of terrorist ties. The German government was sending a signal to the United States: we're doing our part in the war on terror. But the raid was more than a publicity stunt. For years, authorities had been keeping close watch on the company, a textile business called Tatex. According to German police reports shown to NEWSWEEK, some of the firm's past employees appeared to have Qaeda connections. One was close to Osama bin Laden's personal secretary. Another, Mohammed Haydar Zammar, was believed to have recruited Muhammad Atta and the other September 11 hijackers in Hamburg--then sent them to Afghanistan, where they planned the attacks with bin Laden.

German prosecutors began preparing their case. The United States considered freezing Tatex's bank accounts, as it had done to dozens of other companies suspected of financing terrorism. Then something strange happened: nothing. Last summer the German government quietly closed the investigation and decided against prosecuting the company. The United States never touched its assets. Case closed.

George W. Bush has said the United States will relentlessly hunt terrorists and anyone who helps them. So why did the Germans and Americans give up the trail of a company that, according to their own investigators, may have been harboring jihadis? The answer provides a telling glimpse inside the touchy world of post-9/11 diplomacy. Some U.S. and German officials suggest that both countries decided not to proceed with legal action against Tatex to avoid antagonizing the government of Syria.

As it turns out, the Germans weren't the only ones keeping an eye on Tatex. Sources close to the case tell NEWSWEEK that Syria had been secretly involved with the company for years. In 1999, a former Syrian intelligence chief named Mohammed Majed Said bought about 15 percent of Tatex's stock. The Syrians' interest in the company isn't entirely clear. Some German investigators speculate that Syrian intelligence may have infiltrated the company as a cover to spy on Hamburg's community of extremist Syrian exiles--jihadis the Syrians feared were plotting against their secular government. But other investigators believe the Syrians were using Tatex as a front to illegally acquire high-tech equipment from the West. (Tatex officials have repeatedly denied any connection with terrorism or Syrian intelligence. Said could not be reached.)

In the past, the discovery that Syria had a stake in a company with apparent Qaeda ties would have raised a diplomatic commotion. For decades, Washington had been critical of Syria's history of supporting terrorists and its secretive efforts to produce weapons of mass destruction. But lately the White House has tempered its comments. Since September 11, administration officials say, Syria has sometimes been a helpful partner in U.S. antiterror efforts. Officials say Syria has frozen millions of dollars in assets that Saddam Hussein had stashed in Syrian banks. Information from Syrian intelligence has helped disrupt at least three terror plots against American interests, including two planned attacks on U.S. Navy bases in the Middle East. Western officials were also impressed with Syria's help in collaring key Qaeda suspects, including Zammar.

Syrian President Bashar Assad is eager to be seen as a partner in the terror war. Syrian officials boast that they have opened their Qaeda files to the CIA, and insist that bin Laden's network is as much a threat to them as to the West. In return, some hard-liners say, Washington and its allies have rewarded Syria by downplaying its unsavory activities. Germany's national-security adviser, Ernst Uhrlau, says that politics played no role in the decision to drop the Tatex case. Publicly, German officials say there wasn't enough evidence to prosecute. But other sources close to the case say the government insisted the dossier be closed, for what one called "foreign-policy reasons."

German prosecutors do concede that politics played a role in shutting down another Syrian espionage case. In July 2002, authorities arrested two Syrians living in Germany and charged them with spying on Syrian expats. But the day before the trial was to begin, senior government officials dropped all charges against the men. German prosecutors acknowledged that the government had decided that bringing the men to trial would run "counter to overriding public interest, especially the fight against international terrorism."

Not everyone in the Bush administration is buying Syria's newfound claims of cooperation--or its rejection of terrorism. Hawks, including Donald Rumsfeld and Paul Wolfowitz, regularly clash with State Department and CIA officials. The hard-liners believe the White House should be cracking down on the Syrians, not coddling them. Syria, they point out, still supports anti-Israel terrorist groups such as Hamas and Palestinian Islamic Jihad. And Damascus has done too little to stop the movement of weapons and fighters across Syria's long border with Iraq.

Behind closed doors, the hardest of the hard-liners--sticking to their goal of eventually transforming the entire Middle East region--have argued for "regime change" in Syria. But for now, cooler heads at the State Department and White House seem to be winning the argument. Their case is a twist on the old saw about keeping your friends close and your adversaries closer. In a part of the world where America has few friends, Syria may be more useful, and less threatening, as a distasteful ally than as an outright enemy.