The demand is the latest in a series of crippling reparations claims that Iraq's occupying powers are hoping to avert, given Iraq’s faltering economy.
The Iraqi national carrier, grounded since March, has offered to pay $150 million for a final settlement, but Kuwait's ministry of finance refused to accept the offer, said the chairman of Kuwait Airways Corp (KAC), Ahmad al-Zaben.
"The ministry of finance has asked that the case should continue and as a result we ceased contacts with the Iraqi side regarding the settlement," Zaben said in a statement cited by the official KUNA news agency.
Kuwait Airways had said that the $890 million sought in damages was for the destruction of its premises and 15 of its aircraft after ousted Iraqi leader Saddam Hussein's invasion of Kuwait in August 1990, as well as capital loss.
Iraqi Airways is accused of "stealing" two KAC planes and spare parts. The Kuwaiti carrier now operates a fleet of 15 Airbus and two Boeing 777 aircraft.
The case was first filed before British courts by state-owned KAC in 1991, following the emirate's liberation from seven months of occupation by now ousted president Saddam Hussein's troops.
Following the overthrow of Saddam by US-British forces in April, Iraq and Kuwait started talks to settle KAC's claims out of court, Zaben added.
In 2000, KAC won $795 million in damages from a similar case filed in London against insurance companies.
Think again: Paul Bremer wants Kuwait to reconsider its claims
The oil-rich gulf emirate has already won large settlements from heavily indebted Iraq. Iraq is also obliged to pay compensation awarded by the UN to victims of its 1990 invasion of Kuwait.
Money was given to Kuwait from proceeds raised in the oil-for-food programme designed to help ordinary Iraqi citizens.
In May last year, the Governing Council of the UN Compensation Commission awarded Kuwait a lump sum of almost $1 billion, principally to Kuwait’s Ministry of Defence and the Kuwait Oil Company for the removal and disposal of mines and unexploded ordnance.
The funding of such payments is taken out of Iraq’s “oil-for-food” programme. Up to 30% of the revenue from the scheme, which was set up ostensibly to feed Iraq's people, ends up in the hands of claimants. Over $46.6 billion has so far been awarded.
These payments are aside from Iraq's massive external debt, estimated at more than $100 billion.
Bremer sees imbalance
The US civil administrator of Iraq, Paul Bremer, has asked whether, given Iraq's weakened economic condition, Kuwait and Saudi Arabia would accept a delay in the compensation payments, Bremer said, "I think there needs to be a very serious look at this whole reparations issue."
"I have to say that it is curious to me," he said, "to have a country whose per capita income, GDP, is about $800 ... that a county that poor should be required to pay reparations to countries whose per capita GDP is a factor of 10 times that for a war which all of the Iraqis who are now in government opposed," he said.
He added that the Iraqi Governing Council "feels very strongly about that."