Mr Annan's approval means Iraq can continue to sell oil to purchase food, medicine and other supplies. Under the new agreement it will be allowed to spend more than double the previous amount on humanitarian supplies.

The Iraqi Trade Minister, Mohammed Mehdi Saleh, said he was pleased the deal had been signed, but said it did not represent a great advance for Iraq.

The situation would not really improve, he said, until UN sanctions were lifted.

Kofi Annan resolved earlier US objections to Iraq's plans

A BBC correspondent in Baghdad says the agreement will mean a substantial improvement in the standard of living. He says it is seen by the Iraqi Government as a diplomatic victory and expectations are rising that sanctions could be lifted entirely by the end of the year.

The formal approval of Mr Annan had been required before the next six-month phase of the so-called oil for food plan could begin next week.

Iraq has been allowed to sell oil to purchase food, medicine and other supplies, under strict UN monitoring. Earlier this year, the Security Council approved an increase in Iraqi oil exports from $2bn to more than $5bn over the coming six-month phase.

The oil for food scheme, launched in December 1996, is the only exception to an international embargo imposed on Iraq since the 1991 Gulf War.

Iraq had threatened to halt oil exports if Annan did not approve the distribution plan by June 3, when the third and current phase of the programme runs out.

The welfare of ordinary Iraqis prompted the UN plan

Some of the most hotly-disputed points in the distribution plan concerned repairs to Iraq's telecommunications network, and the caloric content of food rations for the country's 22 million people.

Money for telecommunications

Baghdad had demanded $350m to be allocated to repair the country's telecommunications network, but Washington was opposed. Iraq and the UN agreed that a technical mission would travel to the region and evaluate the network's problems.

A UN spokesman said on Thursday the latest phase of the UN oil-for-food program for Iraq is based on expectations the Gulf state will generate $4.5bn in oil exports over six months.

"This plan is based on three billion dollars' of humanitarian assistance, which would require about $4.5bn of oil to be exported," UN chief spokesman Fred Eckhard said.