WASHINGTON - The Pentagon is looking at setting up a commodity market-style trading system in which investors would be able to bet on political or even terrorist events, such as whether terrorists could strike Israel with biological weapons.

Defense officials said using such a betting method has been successful in predicting elections, monetary policy decisions and movie box office receipts. But two Senate Democrats called yesterday for an end to the program before investors start registering Friday, with one calling the proposal "ridiculous and grotesque" and another asking, "What on earth were they thinking?"

The Policy Analysis Market is the brainchild of the Pentagon's Defense Advanced Research Projects Agency, or DARPA, and is directed by retired Vice Adm. John Poindexter, a key figure in the Iran-contra scandal in the 1980s whose computerized Terrorism Information Awareness program also has raised privacy concerns on Capitol Hill.

That "data mining" project would employ "virtual bloodhounds" able to compile records of a person's financial, travel, credit card and health history.

PAM, as the proposed market is called, is intended to help officials predict events and replace "today's approach of discussion and consensus among experts," a Pentagon proposal says.

The market would deal in two kinds of futures contracts: "One pays $1 if an attack takes place; the other pays $1 if there is no attack," according to the Pentagon. A graphic on the market's Web site shows hypothetical futures contracts in which investors could trade on the likelihood that Palestinian leader Yasser Arafat would be assassinated or Jordan's King Abdullah II would be overthrown.

A proposal to Congress in May offered another example: "Will terrorists attack Israel with bioweapons in the next year?"

Registration would start Friday, with trading to begin Oct. 1. The market would be limited to 1,000 traders, increasing to 10,000 by Jan. 1. Contracts would be available based on economic health, civil stability, military disposition and U.S. economic and military involvement in Egypt, Iran, Iraq, Israel, Jordan, Saudi Arabia, Syria and Turkey. The Web site does not say how much could be invested.

Sens. Ron Wyden of Oregon and Byron L. Dorgan of North Dakota said yesterday that the Pentagon should scrap the program immediately.

"Make-believe markets trading in possibilities that turn the stomach hardly seem like a sensible next step to take with taxpayer money in the war on terror," said Wyden, noting that $600,000 has been spent on the program and that the Pentagon plans to spend another $149,000 this year.

The Defense Department has requested $3 million for the program next year and $5 million for the year after.

The Senate version of next year's defense bill would cut off money for the program, while the House would fund it. The bills must be reconciled.

"This is an appalling waste of taxpayers' money," Dorgan said. "We need to focus our resources on responsible intelligence-gathering, on real terrorist threats. ... What on earth were they thinking?

"Can you imagine if another country set up a betting parlor so that people could go in ... and bet on the assassination of an American political figure or the overthrow of this institution or that institution?" Dorgan asked.

Both senators called for an "immediate end" to the program in a letter yesterday to Poindexter.

"Spending taxpayer dollars to create terrorism betting parlors is as wasteful as it is repugnant," the senators said. "The American people want the federal government to use its resources enhancing our security, not gambling on it."

The Pentagon had no immediate comment on whether the program would go ahead as scheduled. A DARPA statement said the market is "a small research program that faces a number of major technical challenges and uncertainties."

Besides DARPA, two private firms are involved in the project, Net Exchange, a market technologies company, and the Economist Intelligence Unit, the business information arm of the publisher of The Economist.

Before more taxpayer money is spent, DARPA said, it would "re-evaluate the technical promise of the program."