German Chancellor Gerhard Schröder, who is hosting the meeting of heads of government of the world's seven richest countries, made the announcement on Friday after a first day of talks at the Cologne world economic summit.

The German Chancellor said that 40% of debts would be cancelled, a sum of around $90bn (£60bn).

The deal includes around $20bn of bilateral aid that, it is hoped, will be cancelled by other nations not attending the summit.

In their communiqué, the Group of Seven called for "faster, deeper and broader" debt relief for countries which agree to economic reform and poverty reduction targets.

The poor in Africa could benefit from debt relief

French President Jacques Chirac said the deal was "a substantial and very important effort" by the world's richest countries to set an example. "We need a world that is more secure and more stable," he added.

Ten percent of the IMF's gold reserves are to be sold to finance the plan.

At the insistence of UK Prime Minister Tony Blair, a clause was added inviting private sector creditors to participate in debt relief.

Campaigners disappointed

Aid agencies welcomed the initiative but voiced doubts that the measures would lead to a real reduction in poverty.

Oxfam said that even after receiving the debt relief, a country like Mozambique would still spend more on debt repayments than on primary education.

Campaigners were also disappointed that the deal did little to reduce the strict conditions attached to receiving the debt relief. And they would prefer all of the debt to be cancelled, not just a part of it.

Peter Morgan reports: "15 million people signed the petition"

Up to 100,000 protesters are expected to gather in Cologne by Saturday. They plan to surround the city with a human chain as the culmination of a year of action organised by Jubilee 2000, a pressure group backed by churches and aid agencies.

Celebrities are joining the protest, with the lead singer of the Irish rock group U2, Bono, urging them on.

He said their aim was to create "lots of pressure on world leaders to drop the debt of the world's poorest countries and make sense out of the nonsense of the millennium".

In London's financial district, violent demonstrations broke out as another group launched a protest against world capitalism to correspond with the opening of the summit.

Three day summit

After spending the opening session discussing the world economy, the leaders of the world's richest countries moved on to confront the situation in Kosovo at a dinner with Russian Prime Minister Sergei Stepashin.

The leaders will then go on to consider further aid for the Russian economy at their working session on Saturday.

Andrew Walker reports: "The agreement has been given a lukewarm welcome by campaign groups"

Russia is hoping to receive billions of dollars from the International Monetary Fund to pay the debts owed to Western banks. But the Duma, the Russian Parliament, has just blocked tax reform plans that the IMF says are essential if it is to receive any aid.

The shadow of Kosovo hangs heavily over the proceedings. As well as wrangling over troop deployments, world leaders also have to decide who will pay for the costs of reconstruction of the shattered Balkan region.

The United States, which says it has paid most for the air campaign, would like Europe to shoulder more of the economic burden of rebuilding Kosovo.

The annual economic summit brings together the heads of government of the United States, the UK, France, Germany, Italy, Canada and Japan, the so-called Group of Seven countries.

On Saturday it becomes a Group of Eight summit when the Russians join the talks.