By Alan Elsner

WASHINGTON (Reuters) - The U.S. Justice Department under Attorney General John Ashcroft failed in 2001 to treat counterterrorism as a top priority, says the commission on the September 11 attacks.

The commission staff statement was issued before the start of two days of hearings on the failure of the FBI and other agencies to prevent the 2001 attacks on New York and Washington that killed around 3,000 people.

It focused on a May 10 Justice Department document that set out priorities for that year. The top priorities cited were reducing gun violence and combating drug trafficking. It made no mention of counterterrorism.

When Dale Watson, the head of the counterterrorism division, saw the report, he "almost fell out of his chair," the report said.

"The FBI's new counterterrorism strategy was not a focus of the Justice Department in 2001," it added.

Then-acting FBI Director Thomas Pickard said he appealed to Ashcroft for more money for counterterrorism but on Sept 10, 2001, one day before the hijacked airliner attacks, Ashcroft rejected the appeal.

Former FBI Director Louis Freeh, testifying before the commission, said the bureau's counterterrorism operations were severely underfunded and understaffed in the years leading up to the attacks.

"In the budget years 2000, 2001, 2002, we asked for 1,895 people -- agents, linguists, analysts. We got a total of 76 people during that period," Freeh said.

"That's not to criticise the U.S. Congress. It's not to criticise the Department of Justice. It is to focus on the fact that that was not a national priority."

Freeh, questioned by Democratic commissioner Richard Ben-Veniste, later said intelligence services were aware of the danger that a terrorist might use a hijacked plane as a weapon.

He acknowledged steps were taken to protect the White House as well as special events, such as the 2000 Olympic Games and meetings of world leaders, against such a threat, but nothing was done to protect the country at large.

'WELL-KNOWN THREAT'

Ben-Veniste asked: "So it was well known in the intelligence community that this was a potential threat?"

Freeh responded: "It was part of the planning for those events, that is correct."

The commission was to hear later from Ashcroft, and his Democratic predecessor, Janet Reno.

The staff report also focused on FBI failures to detect the 9/11 plot, amid new revelations contained in a presidential briefing that the bureau had some 70 separate investigations related to Osama bin Laden's al Qaeda network underway a month before the attacks.

The newly declassified August 6, 2001, briefing said the FBI had detected suspicious activity "consistent with preparations for hijackings or other types of attacks."

The report found the FBI was hampered by a culture resistant to change, inadequate resources and legal barriers.

Despite significant resources devoted to investigations of major terrorist attacks that resulted in several prosecutions, FBI attempts to prevent such attacks failed to make changes across the bureau, it said.

"On September 11, 2001, the FBI was limited in several areas critical to an effective, preventive counterterrorism strategy," the report said, citing limited intelligence collection and analysis capabilities, limited information sharing, insufficient training, an overly complex legal regime and inadequate resources.

Although the FBI's counterterrorism budget tripled during the mid-1990s, its counterterrorism spending stayed fairly constant between fiscal years 1998 and 2001, it added.

On September 11, 2001, only about 1,300 agents, or 6 percent of the FBI's total personnel, worked on counterterrorism.

"Former FBI officials told us that prior to 9/11, there was not sufficient national commitment or political will to dedicate the necessary resources to counterterrorism," the report said.