Spending on defence is to rise by �3.5bn a year - the biggest increase for two decades, Chancellor Gordon Brown has announced.

The rise, announced in Mr Brown's spending review for the next three years, is aimed at helping the armed forces cope with the extra demands caused by the war on terror.

Hoon: Defence increase is "excellent"

The defence budget was heavily stretched by the UK's involvement in action to topple the Taleban regime in Afghanistan.

Mr Brown said the budget would rise from �29.3bn this year to �32.8bn by 2005-6.

Defence Secretary Geoff Hoon said the increase was "excellent".

'Prudent'

He said it would equip the armed forces with the most up-to-date "battle-winning" military hardware.

Mr Brown told MPs: "This is the biggest planned increase in defence spending for 20 years and is a clear sign of the strength of the British economy.

"This government's prudent management of the country's finances has meant that we have been able to find billions extra for health and education, whilst at the same time finding billions extra to ensure that we continue to have one of the best armed forces in the world."

Mr Hoon said the increase "will allow us to invest in the continued modernisation and evolution of the armed forces to meet the new security challenges, including the threat from international terrorism.

"The settlement is also a clear recognition of the contribution made by the armed forces, our service personnel, and the civil servants and others who support them, particularly in recent and continuing operations."