Iraq's Deputy Prime Minister Tareq Aziz has personally denied he had defected and said that such rumors aimed to "sap the morale" of the Iraqi people.
"The rumors are part of the psychological war being waged by the United States ... to sap the morale of the Iraqi people," the ruling Baath party veteran told reporters at a televised press conference.
The British Foreign Office earlier said it was investigating a rumor that Mr Aziz had defected to Kurdish forces in Northern Iraq or been shot dead while trying to flee Baghdad amid a massive buildup of US and British troops set to invade the country. The rumour allegedly came from a Bulgarian source.
Mr Aziz, who has been deputy president since 1981, also said it was "impossible" for President Saddam Hussein to bow to US President George W. Bush's ultimatum to go into exile.
US and Iraqi officials had earlier moved to quash rumours that Mr Aziz had defected.
"These rumours are just not true," a US official said.
Iraq dismissed the rumours as "cheap" lies.
"This is only the latest of a series of lies and propaganda against Iraq. We take little notice of these cheap lies," said a senior Iraqi information ministry official.
The rumors affected oil prices in New York trading and also circulated in financial markets.