Saddam's government held hundreds of US citizens hostage during the run-up to the 1990 Gulf war [EPA]

Iraq has agreed to pay compensation to US citizens who say they were tortured or traumatised by the regime of Saddam Hussein, the late Iraqi leader.

The money would be given to Americans who were affected by the Iraqi invasion of neighbouring Kuwait in 1990, a senior Iraqi government official was cited as saying by the Associated Press news agency on Saturday.

"This agreement is related to the invasion of Kuwait during the former regime time. Saddam detained US citizens as human shields, and he did torture," the official, who did not want to be named, said.

The official said that Baghdad had agreed to pay about $400m to the claimants.

The agreement, signed by US and Iraqi officials, ends years of legal battles and could help Iraq emerge from United Nations sanctions put in place two decades ago.

Baghdad would need the help of the Washington to remove the sanctions, and the settlement may remove what has been a stumbling block between the two sides.

Human shields

Saddam's government held hundreds of US citizens hostage during the run-up to the Gulf War, using them as human shields in hopes of staving off an attack by the US and its allies.

David Ranz, a spokesman for the US embassy in Iraq, said the agreement was signed on September 2 but that Iraq still has to go through several steps for the agreement to be finalised.

Generally such agreements have to be approved by Iraq's cabinet.

Ranz did not say who the specific claimants are or the financial amounts involved.

Many of the Americans pursued lawsuits for years against Saddam's government, keeping up their legal fight after Saddam was overthrown in 2003 and a new government came to power. 

The claimants include Bob Simon, a correspondent of US broadcaster CBS News, who was held for more than a month during the Gulf War.

The deal, which was first reported by the Christian Science Monitor, is likely to anger many Iraqis who consider themselves the victims' of both Saddam and the 2003 US invasion, and wonder why they should pay money for wrongs committed by the ousted leader.

Source: Agencies