Perhaps you're confusing The Observer paper with that the Sunday UK tabloid The News of the World? I can see some dodgy aspects of this particular story (supposedly they didn't want to show the actual doc because the person would be identified yet if the story about the arrest is true that should now be possible) but the Observer doesn't generally just make things up out of thin air (as I understand the Weekly World News does).
Would The Times believe a story from the "Weekly World News"?
Some here have said the Observer & stablemate the Guardian are virently anti-American foreign policy which would explain the publishing of this claim. However, the Observer layed out its view of the Iraqi situation in January 2003 Leader opinion piece, saying: "War with Iraq may yet not come, but, conscious of the potentially terrifying responsibility resting with the British Government, we find ourselves supporting the current commitment to a possible use of force... It is because we believe that, if Saddam does not yield, military action may eventually be the least awful necessity for Iraq, for the Middle East and for the world." (Iraq: the case for decisive action)
Some other Guardian/Observer pieces supporting US policy:
Strike deep, strike broad (September 2001)
Saddam's destruction is now a matter of honour (February 2002)
Bush is right about Arafat (July 2002)
The US has got it right: the case for war is irresistible (August 2002)
The only way to peace (March 2003)
Again, I am skeptical about this article (particularly the bit about the wording "members (minus US and GBR of course)...") but the equating the whole newspaper with the WWN? Nah.