NEW YORK: A suspect in the Russia spy saga cracked after his arrest, confessing he was a Russian agent and pledging greater loyalty to the Kremlin than to his own son, US prosecutors said Thursday.

The suspect, who operated under the false identity of Juan Lazaro, also revealed that his Peruvian born journalist wife, Vicky Pelaez, made several trips to South America to give intelligence to their Russian spymasters.

They are among 11 "deep-cover" suspects charged with trying to infiltrate US policymaking circles and report back to Moscow, in a Cold War-style spy case that has threatened to upset efforts to "reset" ties between the superpowers.

Attorney Preet Bharara outlined Lazaro`s remarkable confession in a letter to Judge Ronald Ellis, imploring him not to make the same mistake as a local court in Cyprus, which freed a key conspirator on bail who later fled.

Although he later denied bail to another pair of key suspects, the judge said Pelaez, who has American citizenship, could be released under house arrest if somebody stumps up the 250,000-dollar bond.

"Vicky`s case is more complicated. She does not appear to be a trained agent. She has a real identity and she is a US citizen, and she has an incentive to stay in the country," the judge decided.

In what was described as a "lengthy post-arrest statement" after waiving his Miranda rights, Lazaro confessed that he was not Uruguayan and that "Juan Lazaro" was not his real name, although he never revealed his proper identity.

He astonishingly told investigators that "although he loved his son, he would not violate his loyalty to the `Service` even for his son," according to the letter. The "Service" is short for Russia`s foreign intelligence service SVR, the successor to the Soviet-era KGB.

Nine of the 11 suspects faced bail hearings on Thursday in three separate courts, but the five awaiting their fate in Boston and Virginia will have to return another day as proceedings were postponed to consider further evidence.

In New York, Richard and Cynthia Murphy -- accused of posing since the mid-1990s as a suburban couple in New Jersey while secretly garnering high-level contacts -- had their bail denied, while judge Ellis said he would decide on Lazaro at a later date.

Ellis said "the government evidence is strong" against the couple, adding that the main concern was that "ultimately the court has concluded that it just does not know who they are."
There was expected to be little chance any would be granted bail after Cypriot authorities were left red-faced when Christopher Metsos, the alleged Kremlin money-man, escaped after being allowed to walk free.

The US State Department scolded the Cypriot authorities for deciding Metsos could be released after simply paying a bond of 26,500 euros (32,330 dollars) and relinquishing his passport.

"As we had feared, having been given, unnecessarily, the chance to flee, he did so," spokesman Philip Crowley said, adding it was too early to say if the United States would issue a formal protest to Cyprus over the case.

The Cypriot authorities said they were still hopeful of catching the fugitive. "We know his whereabouts roughly from the information we have collected," said Justice Minister Loucas Louca.

It was feared Metsos might try to cross into the breakaway northern part of the Mediterranean island -- a well-known haven for fugitives that has no international extradition treaties.

A 10th suspect arrested in Sunday`s swoop, flame-haired Russian bombshell Anna Chapman, had her bail request turned down by Ellis on Monday.

Bharara`s letter also revealed that some 90 messages decrypted by the FBI have not yet been made public and that a raid on a safe-deposit box, after the arrest of the 10 suspects, had yielded yet more evidence.

"Among the items recovered from the safe-deposit box were eight unmarked envelopes -- each of which contained 10,000 dollars, in apparently 100 dollar bills," the attorney said.

Nine suspects face a maximum of 25 years in jail for money laundering as well as another five years for conspiring to work for a foreign government. Chapman and one other only face the lesser conspiracy charges. None of the 11 were charged with the more serious offense of espionage.

The White House has said President Barack Obama knew the FBI was closing in on the suspects when he hosted Russian President Dmitry Medvedev at a summit three days before the arrests.

Medvedev has yet to comment on the scandal although strongman Prime Minister Vladimir Putin, himself a former KGB officer, has criticized US law enforcement authorities, while saying he hoped the row would not harm ties.

BDST: 09:53 HRS, July 2, 2010