"Some kind of settlement" - Juliet Hindel reports

The initiative came as Japan's Prime Minister Keizo Obuchi's visited Moscow, the first such trip for 25 years.

President Boris Yeltsin - cannot ignore nationalist feelings

No details of the plan were revealed, and Japan made no immediate comment, but promised to prepare a response by the time of Mr Yeltsin's forthcoming visit to Tokyo, scheduled for next year.

During their summit in the Kremlin, Mr Yeltsin and Mr Obuchi agreed to speed up work on a formal peace treaty, which has been delayed by the territorial dispute since World War II.

The Soviet claim over the Kuril islands has also marred trade relations between the two countries.

Russian Foreign Minister Igor Ivanov described the plan as an attempt to create "conditions on the Kuril islands to ensure favourable terms for joint economic activities on the islands without detriment to state interests and political positions of the two sides".

"[Prime Minister] Obuchi expressed satisfaction with Russia's proposals and assured that these proposals would be thoroughly studied," Mr Ivanov said.

A sub-commission, part of a working group drawing up the fine print of a peace treaty, would start working on territorial demarcations between the two countries, as well as on the joint economic management of the Kuril islands, Mr Ivanov added.

"An understanding was also reached on the necessity of resolving the matter of how Japanese citizens who used to live on the islands can visit the Kurils," Mr Ivanov was quoted as saying.

He added that, at the end of the summit, both sides would sign a joint statement - the Moscow Declaration - which would incorporate all diplomatic initiatives undertaken over the past five years and define relations between the two countries into the next century.

Correspondents say that the announcement is seen as a sign of progress, but reaching a final agreement is expected to be a long and difficult process.

The BBC's correspondent in Moscow, Paul Anderson says that although the islands represent a miniscule percentage of Russia's land mass, but are seen by nationalists and communists as the legitimate spoils of a war in which millions of Soviet people were killed.

Many Russians face increased hardship

But in a worsening economic crisis, Mr Yeltsin also needs to better relations with Japan to attract aid and exploit untapped trading opportunities.

The Japanese side put forward concrete proposals on boosting trade, humanitarian and cultural ties.

Japan has also put together an aid package of $1.5bn with the International Monetary Fund and has suggested that payment of the aid might be accelerated.