In return, Islamabad has agreed to withdraw its claim to the F-16 aircraft.

New Zealand has agreed to lease or buy all of the planes, and the proceeds will be used to reimburse the US Treasury, White House officials said.

Mr Sharif: The row strained relations

Pakistan bought the aircraft to bolster defences against long-time enemy India.

But delivery was stopped after 1990 when the US ended all military aid to Islamabad in protest against its nuclear weapons programme.

Of the $658m that Islamabad paid for the F-16s in 1989, $157m has already been returned.

The bulk of the balance will be paid out of a US Treasury Department fund used to settle legal disputes with the government.

In addition, the US will provide Pakistan with other goods up to the value of $140m including $60m in white wheat.

The eight-year row over the F-16s has been a headache for Pakistan, which is grappling to repay millions of dollars on its $32bn foreign debt.

'Long-standing irritant'

Details of the payment were released by the White House following an agreement between the two sides announced at the weekend.

Pakistani Prime Minister Nawaz Sharif said on Saturday that the issue had been ''a long-standing and a persistent irritant'' in relations with Washington.

India and Pakistan carried out tit-for-tat nuclear tests this May resulting in global condemnation and economic sanctions by the US.