The United Arab Emirates has cancelled almost $7bn, including interest payments and arrears, owed by Baghdad during a visit by Nuri al-Maliki, Iraq's prime minister.

The move on Sunday came amid calls for Arab nations to support Iraq's recovery and end the diplomatic isolation caused by the ongoing violence. 

Sheikh Khalifa bin Zayed al-Nahayan, UAE's president, told al-Maliki that the UAE has "decided to write off all debts owed by Iraq totalling $4bn dollars ... plus accrued interest," the official WAM news agency reported.

The Gulf state also named its current envoy to India, Abdullah Ibrahim al-Shehhi, as  its ambassador to Iraq.

The UAE withdrew its most senior diplomat - a charge d'affaires - from Baghdad in May 2006 after another diplomat was kidnapped and held for two weeks.

No ambassador from any Arab country has been stationed permanently in Baghdad since Egypt's envoy was kidnapped and killed shortly after arriving in 2005.

Last month, the UAE's Sheikh Abdullah bin Zayed al-Nahayan became the first Gulf Arab foreign minister to visit Baghdad since the US-led invasion in 2003.

A US official said that Sunni Arab states had been encouraged to re-engage with Iraq by the crackdown on Shia militias by al-Maliki, himself a Shia.

Sheikh Khalifa said that Abu Dhabi would not hesitate to "provide all kinds of financial and moral aid" to Iraq.

Over the past three years, about $66.5bn of Iraq's overall $120.2bn foreign debt has been forgiven. The Paris Club, cancelled $42.3bn, including Russia's $12bn, while Non-Paris Club members have cancelled a total $8.2bn.

The club is an informal group of creditors from the world's richest nations which works to provide debt relief for developing countries.

Last year, Saudi Arabia pledged to cancel 80 per cent of more than $15bn in Iraqi debt, but has yet to follow through. Kuwait, which is also owed $15bn, has yet to write off any debts.