US special envoy James Baker and French President Jacques Chirac held talks on Tuesday on how to tackle Iraq's estimated debt of $40 billion, owed to countries that make up the 19 Paris Club countries.

The US and France had been deeply divided over the invasion of Iraq in March and the role of France in the postwar period.

Both countries agreed that a deal to reduce Iraq's debt should be reached by the Paris Club of creditor states by 2004. The Paris Club, is made up of countries and agencies with claims on indebted countries; France chairs the group.

Key role

On Monday, the French foreign minister, Dominique de Villepin, said France was keen to carve out a key role in aiding Iraq and was prepared to write off some of the war-torn country's debts.

Sources close to the Paris Club said recently there were two major prerequisites to any deal: a fully recognised government in Iraq and a basic agreement between Baghdad and the IMF on the country's economic strategy.
One source said the US-led occupation authority in Iraq would not be deemed as sufficiently legitimate to sign legal debt deals concerning the write-off and rescheduling of repayments over decades, as well as issues such as oil output.

Members of the Iraqi delegation that were in Paris welcomed the French offer to push for debt relief with the creditor countries.

Russia, another major creditor, appealed on Monday for a debt deal to be worked out under the auspices of the Paris Club, clearly keen to ensure that every creditor recieved a fair share of whatever money was paid back in the end.