Brazil and Paraguay have ended a decades long dispute over a hydro-electric dam on their shared border, with Brazil agreeing to triple the amount it pays its neighbour for energy.

The deal, agreed on Saturday, is a major victory for Fernando Lugo, Paraguay's president, who came to office promising to secure better terms for the energy sold from the Itaipu dam.

According to a joint statement, Brazil agreed to pay Paraguay $360m a year for power from the dam, up from the current $120m.

Paraguay also won the right to gradually sell excess energy from the dam directly to the Brazilian market instead of doing so exclusively through state-owned power utility Eletrobras.

Another Paraguayan demand that the sides be allowed to sell to third countries will be readdressed in 2023.

Currently, energy from the dam can only be traded between the two countries, with Paraguay selling 95 per cent of the energy produced to Brazil.

Political gains

The deal gives Paraguay's Lugo some much need political capital.

The former Roman Catholic bishop, elected last August, has seen his first year as president marked by a severe economic downturn and scandals over revelations he fathered children during his time as a bishop.

Inacio Lula da Silva, Brazil's president, speaking at a ceremony at the Paraguayan presidential palace alongside Lugo,  called the deal "historic".

He described the agreement as part of a Brazilian campaign to help boost economic growth in the region and pledged to fund several major infrastructure project in Paraguay through bank loans.

"Bigger countries have an obligation to help countries with smaller economies in order to boost their development, initiative and competitiveness capacity," Lula said.

Another $450m would go toward financing a transmission line 350km long from the dam to Asuncion, Paraguay's capital, to enable more widespread distribution of energy throughout the country at lower costs, he said.