It said a bilateral agreement was signed in Beijing, without specifying the date, and that China's ambassador to Iraq had met officials in Baghdad to confirm the agreement.

The statement added that the two countries entered into trade deals valued at 3.8 billion dollars in 2009.

In Beijing, foreign ministry spokesman Ma Zhaoxu told AFP "China and Iraq have reached an agreement not long ago... to substantially cancel the debts Iraq owes to Chinese companies."

"China has long been assisting Iraq to realise stability and development by offering aid, cutting debts and helping its economic restoration," he said in a faxed statement.

Beijing "exempted in 2007 all the debts Iraq owed to the Chinese government," the statement added, without giving specific figures.

State-owned Chinese oil firm CNPC has clinched some of the biggest deals in the Iraqi oil sector since the US-led invasion that toppled Saddam Hussein in 2003.

It was the leading member of a successful consortium bidding for the Halfaya field in southern Iraq in December.

The Chinese firm had already signed a deal last year, along with Britain's BP, to ramp up production at Iraq's biggest oil field, Rumaila.