"It's Congo," a delegate inside the meeting of heads of state and foreign ministers told Reuters by phone. A second delegate confirmed the decision on Tuesday.
A five-nation committee set up to resolve the dispute drew up the compromise, which ended a disagreement over the leadership that had overshadowed the Khartoum summit.
The controversy over Sudan's AU bid dominated talks at the summit which officially was to tackle issues of culture and education and touch on the conflicts in Ivory Coast and Chad's border clashes with Sudan, among other problems.
Sudan's bid to head the 53-nation body had failed to win unanimous support because of the conflict in Darfur, where the AU is mediating peace talks and has deployed a peacekeeping force.
The bid by President Omar al-Bashir, who seized power in a 1989 coup, caused unease as the AU is the main peace negotiator in its western region of Darfur, where 300,000 people have died over the past three years.
Sudan, which last year signed a historic agreement ending 21 years of war in the south, had won support from Egypt and Libya for its bid, but west African and southern African governments were reluctant to give Khartoum the high-profile position.
Human rights groups had said that giving Sudan the AU chair would be as good as rewarding a regime accused by the United States of genocide in Darfur, and would damage the AU's credibility.
George Bush, the US President, expressed concern on Monday at the prospect of a Sudan-led AU, citing the situation in Darfur.
Sudan failed to win total support
because of the conflict in Darfur
"It is a concern to us, and it should be a concern to the AU nations," Bush said at a public meeting in Kansas, noting that if Sudan takes over the bloc's leadership it would "put them the titular head of the troops on the ground."
The AU deployed a 7000-strong peacekeeping force to the zone in 2004, but it has been unable to put a stop to the bloodshed between rebels and militias backed by government troops.
Darfur rebels taking part in AU-sponsored peace talks in Abuja had said they would pull out of the negotiations if Sudan was given the presidency of the AU.
The compromise on the AU chair would thrust President Denis Sassou-Nguessou, a military leader who ruled Congo from 1979 to 1992 and returned to power in 1997 in a coup, into the limelight.
He would succeed Olusegun Obasanjo, the Nigerian President, who held the AU presidency since 2004.