The agreement was seen as the first signal of a thaw in transatlantic relations over Iraq, and could herald debt cancellations by other creditors.

America and Britain had been pressing for the cancellation of the debt, all of it accumulated during the previous regime of Saddam Hussein.

Until yesterday, however, the move was blocked by countries including France, Germany and Russia, which strongly opposed the US-led war. They argued that an oil-rich country should not be given preferential treatment over poorer Third World debtors.

Nevertheless the two sides reached a compromise. “It’s a good arrangement for Iraq and it will also show how the world community can come together in a very cooperative way to address a problem,” said a senior American official. Under the terms of the deal, creditor nations in the Paris Club will cancel $33 billion (£20 billion) of the debt in three stages. The move is intended to help the country rebuild its battered economy and infrastructure.

While Iraq still has outstanding debts of $80 billion (£47 billion), mainly owed to creditors such as Kuwait and Saudi Arabia, the move by the international community could now prompt the Arab nations to write off some Iraqi debt.

There were hopes that yesterday’s deal, announced in Paris, could also open the way for political reconciliation over Iraq.

The foreign ministers of 20 countries, including Iraq, its six neighbours, America, Britain, France, Russia and China begin two days of talks today on the country’s future in the Egyptian resort of Sharm el-Sheikh.

The Bush Administration is focused firmly on holding elections in Iraq on January 30 and wants as much international support for the process as possible. Aside from declarations in favour of peace and democracy for Iraq, British officials said that they were looking for concrete steps as well.

Baghdad and its American and British allies want strong commitments from Syria and Iran that they will stop the movement of militant Islamic volunteers crossing the border into Iraq to join the insurgency and use violence to make voting impossible.

“We have been complaining to them for months about this. Finally I hope that they are taking some action,” said an Iraqi official.

US forces, which led the assault on the insurgent stronghold of Fallujah last week, found evidence that foreign fighters from across the Arab world have been able to enter Iraq from Syria and join the ranks of the Iraqi resistance. Many have been used as suicide bombers by the Jordanian-born terrorist Abu Musab al-Zarqawi.

Baghdad also wants much more help from the broader international community. So far the United Nations has only sent out a token team of a handful of election experts to Iraq to help organise a voting register, train electoral officers and prepare the country for the polls in two months’ time.

Kofi Annan, the UN Secretary-General, who will also be at the Red Sea resort meeting, will be asked to make a much bigger effort to help the 26 million-strong nation prepare for its first general election.

So far the UN has insisted that it is unable to commit more people safely in Iraq unless it is given protection by foreign forces not connected with the US-led coalition. So far only Fiji has volunteered 130 troops to protect UN staff.

The meeting in Sharm el-Sheikh will probably be the last major diplomatic mission by Colin Powell, the outgoing US Secretary of State. He may use the occasion to hold a formal meeting with his Iranian counterpart. The two countries have not had direct contact since the Iranian Revolution a quarter of a century ago.

• The wife of a soldier serving in Iraq told yesterday how her husband telephoned from Camp Dogwood at the moment she went into labour.

  Trooper James Belton wanted to tell Sam, his wife, that he was OK when she stunned him with the news that she was in hospital and about to give birth. She was a week overdue with their first child.

  His wife said: “He was in shock.” Then, she said, Trooper Belton, who has been at Camp Dogwood for three weeks, whooped with joy and said: “I’m going to tell all my mates that I’m a daddy.”

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