Secretary of State Mike Pompeo agreed to consider disciplinary action against the envoy, Brian Hook, although strong measures appeared unlikely as management also disputed the report's conclusions.
Under pressure from lawmakers, the State Department's inspector general probed the early removal of Sahar Nowrouzzadeh, a career employee and US citizen, from the Office of Policy Planning, the internal think tank that sets priorities for US diplomacy.
A long-awaited report by the internal watchdog, released on Thursday, said that the White House, two months after President Donald Trump took office in 2017, forwarded an article in conservative US media that was critical of Nowrouzzadeh's continued position and highlighted her ancestry.
Julia Haller, a short-term liaison from the White House in charge of political appointments, in an email cited by the report said Nowrouzzadeh "was born in Iran and upon my understanding cried when the President won".
Hook, who has championed Trump's hard line on Iran and was then head of policy planning, removed Nowrouzzadeh in April 2017, three months before her one-year appointment made under former secretary of state John Kerry was due to run out.
The report found no evidence that Hook personally shared bias based on Nowrouzzadeh's Iranian origin but said he did not refute the campaign against her, either.
"The comments regarding her perceived place of birth are particularly concerning," the report said.
"Regardless of whether Mr. Hook personally shared the opinions and motivations expressed by Ms. Haller and others, the comments about (Nowrouzzadeh) in the articles and emails circulated within the Office of the Secretary suggest that improper factors likely influenced the requests to end her detail," it said.
Nowrouzzadeh - who has since taken a fellowship at Harvard University, where her biography says she was born in Connecticut - hailed the report and said that she "proudly" served the United States across Republican and Democratic administrations for 15 years.
"I continue to strongly encourage Americans of all backgrounds, including those of Iranian heritage, to consider public service to our nation and to not be discouraged by these findings," she wrote on Twitter.
Upholding 'professional behavior'
The inspector general recommended additional training on personnel practices and said Pompeo "should consider whether disciplinary action is appropriate".
The State Department in a response said Pompeo would consider discipline but set no timeline.
One of Pompeo's top aides, Ulrich Brechbuhl, wrote that the State Department "disagrees" with the report's conclusion but said that management is "committed to ensuring the highest levels of professional behavior."
Hook, in a lengthy reply to the inspector general, said he had already found a replacement candidate before the unflattering article was published on Nowrouzzadeh.
"I did not start any of these conversations" about Nowrouzzadeh's ancestry or alleged political leanings, which were "wholly irrelevant to my personnel search for an Iran and Gulf expert," he said.
Hook has been at the forefront of Trump's hawkish stance against Iran's clerical regime. Trump withdrew from a denuclearization deal negotiated by Kerry and instead imposed sweeping sanctions on Iran.
Haller, a lawyer who now works at the Department of Housing and Urban Development in an office reaching out to religious groups, acknowledged to the inspector general that the detail of Nowrouzzadeh crying over Trump's victory may have been "office gossip."
But she justified sharing the information as it could raise a question of "loyalty to the United States," the report quoted her as saying.
The inspector general also examined five other cases. In two, it found no evidence of bias and it said it could not reach conclusions over the treatment of two other employees, including a former senior official who was accused of being unfriendly to Israel.
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