Britain is to cancel Mozambique's total debt to it of £80m, to help it combat poverty, Gordon Brown has said.
Mr Brown is on a six-day tour of Africa
It will also pay 10% of the southern African country's £1.07bn debt to international lenders such as the World Bank and IMF, the UK chancellor said.
Mr Brown was speaking in Mozambique's capital, Maputo, as part of a six-day African tour.
On Friday, he signed a debt-relief deal with Tanzania and promised similar deals for 70 other developing nations.
Speaking in Maputo, Mr Brown said he was confident Mozambique could use the money it saved to invest in education, health and infrastructure development.
He said: "It is so important that the numbers of people living in poverty in this country have fallen as a result of more investment in education, health and poverty programmes and they should continue to fall."
Britain has promised to pay 10% of the foreign debt bill of the entire developing world under what Mr Brown has dubbed a "new Marshall plan".
Under the plan, which will cost Britain £1bn, developing countries must promise to spend the money they save on education, health and welfare.
The chancellor says he hopes other G8 and European countries will follow the UK's lead.
His visit to Mozambique has included meetings with the country's outgoing President, Joaquim Chissano, President elect Armando Guebuza and Prime Minister Luisa Diogo.
He toured a sugar factory outside Maputo and was due to visit Maputo port.
Mr Brown will head to South Africa later on Saturday for the final leg of the tour, which began in Kenya.