Finance ministers from the world's richest countries have partially backed a controversial US proposal to give aid to poor countries in the form of grants instead of loans.

Senior figures in the Bush administration have been keen to make the switch ever since taking office in January last year.

One of the biggest proponents is Treasury undersecretary for international affairs John Taylor, who told reporters that it was a "nice compromise which everyone can view as a win".

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His boss, US Treasury Secretary Paul O'Neill, is meeting his G7 colleagues from Japan, the UK, France, Italy, Canada and Germany in the coastal city of Halifax in eastern Canada.

The plan is to thrash out the agenda ahead of the full-scale G8 summit - also including Russia - in Kananaskis later this month.

The deal means that 18%-21% of World Bank aid will now come in the form of grants rather than loans, with countries whose average per capita income is below a dollar a day receiving almost all their aid as a grant.

Mr O'Neill, who recently toured Africa with the rock star and debt campaigner Bono, has said that aid has to be delivered more effectively, rather than in larger quantities.

Payback

The US had been pushing to raise the grant ceiling to 50% in the face of strong opposition from Europe, particularly the UK.

While on the face of it the US idea would relieve poor countries' debt burden, UK ministers have pointed out that without increasing the amount of money available to the World Bank, the switch to grants risks exhausting the institution's resources.

Some have even suggested that this would come as no disappointment to the Bush administration, citing its distrust of international bodies, and the laissez-faire tone of its economic policies.

In the event, the compromise reached will also ensure that the final communique from this weekend's meeting will include a commitment regularly to replenish the Bank's funds.

Focus on Africa

Also high on the agenda is the New Partnership for Africa's Development (Nepad), the multi-billion dollar investment plan created by African leaders including South Africa's Thabo Mbeki and Nigeria's Olusegun Obasanjo.

The two presidents - with Senegal's Abdoulaye Wade - have been meeting with their colleagues from across the continent to try to finalise the Nepad deal.

They are asking for greater access to Western markets as a reward for having opened up their markets to Western exports.

They also want much more investment, in return for which they are offering assurances that Africa will strive to crack down on corruption and improve standards of governance.

The continuing crisis in Argentina and the prospects for economic recovery in the US, Europe and Japan will also come under scrutiny.

And the ministers will discuss collective action to fight money laundering and block terrorist funds.