FALLUJA, December 24, 2004(Reuters) - Iraqis reacted with anger, frustration and resentment Friday after many returned to Falluja to discover their homes in rubble and their livelihoods ruined following last month's U.S. offensive.

"I saw the city and al-Andalus destroyed," said Ali Mahmood, 35, referring to the district of the city he returned to briefly Thursday but now plans to leave after seeing the mess.

"My house is completely destroyed. There is nothing left for me to stay for," the teacher said, adding that he would rather live in the tented camp outside Falluja that has been his family's home for the past two months.

Defense Secretary Donald Rumsfeld, on a suprise pre-Christmas visit to Iraq, visited troops at a base near Falluja Friday but made no mention of the city's rebuilding.

Marine Lieutenant General John Sattler told Rumsfeld how intense the fighting had been in the city, where much of the combat was house-to-house and even hand-to-hand.

"You come through the door and it's who wants it most, and it was us," Sattler said, praising the resolve of his men.

Conservative estimates say several hundred buildings were partly or completely destroyed by the U.S. assault, which began on Nov. 8 and involved bombardment by U.S. planes, tanks and artillery. Rebels also blew up many homes in booby-trap blasts.

The offensive, designed to uproot insurgents from what had become a guerrilla bastion, was declared a success more than a month ago, but fighting continued in several districts. U.S. planes bombed a western neighborhood overnight, residents said.

An Iraqi Health Ministry official said his greatest concern was the resentment Falluja's people were likely to feel when they saw how much damage had been done to their homes.

That was certainly the case Friday. While those who fled were at pains to say they had nothing to do with the rebels who made Falluja their stronghold, many of them have since become angry and militant as a result of the offensive.

"Would Allah want us to return to a city that animals can't live in?" said Yasser Satar as he saw his destroyed home.

"Even animals who have no human sense and feelings can not live here," he said, crying.

"What do they want from Falluja? This is the crime of the century. They want to destroy Islam and Muslims. But our anger and resistance will increase."

NO WATER, ELECTRICITY

Aid workers said 200,000 people fled Falluja before the assault and have spent the past seven weeks living in nearby towns and villages or in tented refugee camps nearby.

The city was estimated to have had a population of around 250,000 before the offensive. It is not clear how many people stayed behind during the fighting, although it is thought to have been around 50,000, mostly in outlying areas. Most central areas became a ghost town.

The Iraqi interim government and the U.S. military this week announced that around 2,000 heads of household would be allowed to return to the Andalus district of Falluja, considered one of the more secure, from Thursday.

Some 900 people, mostly men, made the journey, going through intense security checks before being allowed to enter, including fingerprinting and iris scanning of "suspicious military-age men" to ensure insurgents do not filter back in.

The U.S. military said the program to return residents had gone well Thursday and it expected more people to flow back into the Andalus district in the days ahead. In the coming weeks, others will be allowed to return to their neighborhoods.

But they will be without water and electricity as basic services and communications were knocked out in the assault.

Iraq's government has said it will pay $2,000 compensation for partial damage to homes, $4,000 for substantial damage and $10,000 to those whose homes were completely destroyed — far less than Iraqis say they would need to rebuild their homes.

Shopkeepers will receive $1,500-$3,000 based on the size of their shop and what they sell. But that may not be enough to assuage the anger of many. Asked Satar: "Is this freedom and democracy that they brought to Falluja?"

(Additional reporting by Omar Anwar and Luke Baker)

Copyright 2004 Reuters News Service. All rights reserved.