BBC Correspondent Ade Akintonwa: A step back towards the USSR?

The move will need to be ratified by referendums in both countries, reports say.

But monetary union will come into force without prior popular approval.

The merger comes despite fears in Moscow that it could put further strain on Russia's exhausted economy.

The deal to forge a "union state" was signed by Russian President Boris Yeltsin and his counterpart Alexander Lukashenko.

Apart from the economic interests, many politicians in both nations believe the main motive behind Mr Lukashenko's drive for union is his ambition to run for the Russian presidency.

He said: "God help us to enter the next millennium as a single state."

Mr Yeltsin added: "We can be proud of such work."

Ecomomic union

The accord calls for union over economic, foreign and defence policies, the removal of customs barriers, and harmonisation of tax, currency and monetary policies.

But correspondents say liberal politicians in Moscow do not share Belarus's enthusiasm for the union as Belarussian Soviet-style economic policies do not complement Russian market reforms. They fear a merger could put further harm Russia's economy.

In an immediate step to ease Belarus's problems, the two presidents agreed to allow Russian and Belarussian companies to import goods from each other at domestic prices.