Regional leaders see the bank as an alternative to US-led lenders

The body is designed to supersede the World Bank and International Monetary Fund (IMF), seen by many as responsible for failed policies in the region.

Funded by regional powers such as Brazil, Argentina and Venezuela, it will aid economic and social projects.

Each member will have one vote, irrespective of its size or funding.

Alternative voice

Set up by Brazil, Venezuela, Argentina, Uruguay, Paraguay, Ecuador and Bolivia, the Banco del Sur's headquarters are going to be in Caracas, with offices in Buenos Aires and La Paz.

It'll be very difficult to have an institution that operates with transparency and efficiency Alan Cibils, economist Rival seeks to usurp IMF

The idea was born after what analysts say were the failed economic recipes suggested by the IMF and the World Bank.

The agreements to formally set up the bank were signed at a ceremony at the presidential palace in Buenos Aires, hosted by Argentine President Nestor Kirchner and his wife, President-elect Cristina Kirchner who is being inaugurated on Monday.

Bolivian President Evo Morales said the bank would provide a tool to help to combat poverty in the region and brought "new hope" for the people of South America.

President Hugo Chavez of Venezuela said such a proposal had been "unthinkable a decade ago".

Today, he said, "it is a political reality that forms part of an economic and social war".

The bank aims to start with capital of $800m (�400m) and eventually gather $7bn, with funds to deal with natural disasters and develop joint scientific and economic projects across the region.

Brazilian President Luiz Inacio Lula da Silva said the bank's formation was a "decisive step" towards the integration of South America, and he invited other countries in the region to join.

However, although the project sounds grand, the arguments over how the bank will operate have already begun, says the BBC's Daniel Schweimler in Buenos Aires.

Argentine economist Alan Cibils said that from a theoretical point of view such a bank had been necessary for a long time.