An international arbitration commission and an Australian court ruled on Saturday that the government must make the payment to the company.

The size of the payment, and what proportion of the $18m claim it represents, are not yet clear.

'Swallowed pride'

Papua New Guinea Prime Minister Bill Skate said he had swallowed his pride in making the payment - something which his government had previously vowed not to do.

But he said that continuing the legal battle against the mercenary company would cost more than settling the debt.

The contract with Sandline was highly controversial, and led to the fall of the previous government.

Sandline boss Tim Spicer under arrest in 1997

Papua New Guinea is trying to raise foreign capital by means of government bonds, and there were fears that an outstanding claim by Sandline would undermine confidence in the country's finances.

An international tribunal ruled last year that Papua New Guinea must pay Sandline the full $18m, but the government appealed against this ruling.

In February, the company won a Luxembourg court order allowing it to seize Papua New Guinea assets in Europe.

The government said at the time it would launch a legal bid to recover an advance payment already made to Sandline.

Employed to stop secession

PM Julius Chan engaged Sandline's services

The previous government engaged Sandline's services in January 1997 to deal with a breakaway movement in Bougainville Island.

The then Prime Minister, Julius Chan signed a contract worth $36m with the London-based mercenaries, $18m of which was paid in advance.

But Mr Chan resigned after Papua New Guinea troops mutinied over the presence of foreigners, sparking demonstrations in the capital, Port Moresby.

Several Sandline employees, including leader Lieutenant Colonel Tim Spicer, were arrested.