Baker, a longtime family friend, is to be Bush's "personal envoy" to lead efforts to restructure and reduce Iraq's foreign debt.

"In response to a request from the Iraqi Governing Council for assistance, I have appointed James A. Baker III to be my personal envoy on the issue of Iraqi debt," Bush said in a statement read to reporters by spokesman Scott McClellan.

Baker, who will report directly to Bush, "will lead an effort to work with the world's governments at the highest levels, with international organisations and with the Iraqis in seeking the restructuring and reduction of Iraq's official debt," the president said.

Baker, 73, led US diplomacy under Bush's father, former US president George Bush Snr, notably assembling the broad international coalition that backed the use of military force to end the Iraqi occupation of Kuwait in 1991.

The wealthy lawyer also headed George Bush's legal team during the fierce battle over election results in Florida in 2000, playing a key role in getting the current president to the White House.

McClellan told reporters that Baker would benefit from his skills as a veteran diplomat and his "strong personal relations with the president of the United States" as he worked to ease the war-ravaged nation's debt burden.

"The future of the Iraqi people should not be mortgaged to the enormous burden of debt incurred to enrich Saddam Hussein's regime," the spokesman said.

But the spokesman sidestepped questions about whether Baker would seek outright forgiveness of what the International Monetary Fund (IMF) has estimated to be $120 billion in debt.