The two leaders discussed Pakistan's nuclear policies and the return of $501m owed to Pakistan for US fighter jets it never received.

The BBC's Richard Lister: Mr Clinton is keen for a new spirit of co-operation

"All of you know of my concern to do everything we can to end the nuclear competition in South Asia, which I believe is a threat to Pakistan and India and the stability of the world," Mr Clinton said as talks began.

Mr Sharif's visit was aimed at easing tensions sparked by Pakistani nuclear tests in May, which followed surprise blasts by its rival India.

President Clinton: Waived sanctions until October 1999

Mr Clinton immediately slapped sanctions on both countries and is demanding they sign the Comprehensive Test Ban Treaty (CTBT) before he will lift them completely.

Mr Sharif has said Pakistan will sign by September next year but made no fresh commitments during Wednesday's meeting.

He is due to meet officials at the International Monetary Fund and World Bank later on Thursday.

Sanctions

Shortly before the talks, Mr Clinton eased some sanctions allowing the two countries to receive loans and investments from American financial institutions, as well as military training.

Prior to the talks Mr Sharif welcomed Mr Clinton's decision.

He said the sanctions, were "unjustifiably imposed on Pakistan" which had been forced to react to India's nuclear detonations.

"We sincerely hope that President Clinton's decision would prove to be a harbinger for the complete lifting of sanctions."

BBC State Department Correspondent Richard Lister says Mr Clinton wants further commitments from Mr Sharif that he will tighten controls on fissile materials and refrain from arming missiles with nuclear warheads.

BBC's Abbas Nasir: "Sanctions bit deeply"

But he says it is clear that much of the cloud over the relationship between the two countries has now lifted.

Pakistan's economy has been heavily hit by the sanctions, and Mr Clinton's decision could now release a $5.5bn IMF bailout.

During the meeting the two leaders also discussed how to compensate Pakistan for an aborted arms deal involving 28 F-16 fighters.

Pakistan bought the planes from the US in 1989 but delivery was stopped a year later following fears that Islamabad was developing nuclear weapons.

New Zealand has now offered to buy the planes. Mr Clinton has said revenues from that sale might be used to repay Pakistan.

Mr Clinton hopes to visit India and Pakistan in 1999, after cancelling this year's scheduled trip in response to the nuclear weapons tests.