Of course they knew it would have negative consequences - why do you suppose they ran it to begin with? They saw their chance to take another cheap shot at the Bush Administration and to undo everything our miltary has fought and died for in Afghanistan and Iraq, and of course they took it. As for the truth of the story, how many times have we seen Newsweek in particular (Monica Lewinsky) and the MSM in general (Nancy Pelosi's ethics problems, Hillary's campaign finance scandals, ad nauseum) scuttle stories that had solid bases in fact because they would have "negative consequences" for the wrong people (fellow liberals)? You're straining at a gnat while swallowing a camel.
That's the issue that everyone seems to be overlooking.
The real issue that's being overlooked to some extent is, who fed Newsweek this bogus story, knowing that they'd snap at it like a marlin at a squid? Obviously their source is yet another Bush-hating leftist troll embedded in the DOD, and this was probably the highlight of his/her/it's whole career.
Since the story was false, it's critical we know who it was. But again, even if the editors at Newsweek were convinced this was true by a videotaped interview and sworn deposition, or even if it was really true, my point is that the story should not have run.