It's an arrangement that suits both of our countries very well

Australian Foreign Minister Alexander Downer.

The tough policy was brought in after a standoff in August when Australia refused to take 433 asylum seekers who rescued from a sinking boat by a Norwegian freighter.

Many of those migrants were sent to makeshift camps on Nauru - described by Amnesty International last week as "hellish and barren".

The camps were set up to temporarily house migrants while their asylum claims are processed.

Pacific tour

Nauru signed the new deal on Tuesday during a visit by Australian Foreign Minister Alexander Downer.

Australia has built two camps on Nauru

"Australia will continue to meet all costs associated with the transfer, processing and accommodation of the asylum seekers, in addition to meeting the operating costs of the processing centres," Mr Downer said in a statement.

The minister is on a tour of the Pacific to try to harness support for the controversial policy.

Papua New Guinea has taken in asylum seekers, but Fiji, Kiribati and the tiny nation of Tuvalu have all said no.

Public support

Australia is trying to find places for more than 600 boat people who are staying temporarily on Australia's remote territories of Christmas and Coos islands.

Many asylum seekers come via Indonesia

Mr Downer said the aid money for Nauru - the world's smallest republic - would be focused on "health, education and infrastructure."

Last year, more than 4,000 asylum seekers got into Australia on boats arranged by smuggling gangs operating mainly out of Indonesia. Most were from Afghanistan, Iraq, the Middle East and South Asia.

The government crackdown on asylum seekers won widespread support in Australia, winning it a third term in office in November elections.

But Australia has faced a constant stream of criticism from refugee agencies, former political leaders, church and human rights groups.

Meanwhile, a woman held with 530 other boat people on Christmas Island has been diagnosed with typhoid.

The woman, who arrived on a boat from Indonesia, is now in hospital with her two children. Her identity and nationality were not released.