Zimbabwe's oil deal with Libya has reportedly collapsed as the government prepares to deregulate the country's oil industry.

Libyan ambassador to Zimbabwe, Mohammad Azzabi, was quoted by a South African paper as saying the deal was terminated for commercial and not political reasons.

"It's a matter of supply and demand," Mr Azzabi told the Sunday Times.

"It's not political but maybe it appears semi-political in a way because we are not taking out the money which Zimbabwe pays since we are investing it here," he said.

Economically troubled Zimbabwe has relied on Libya to supply 70% of its oil for the last two years.

Libyan leader Muammar Gaddafi has offered president Robert Mugabe political and economic support in the face of Western criticism of Zimbabwe's land redistribution policies.

No comment

Officials at the state National Oil Company of Zimbabwe (NOCZIM), which imports the bulk of the country's fuel, and the government have not reacted to the report.

The $360m (�226.4m) deal with Libya's Tamoil was renewed in September but Zimbabwe has failed to keep up payments, owing an estimated $90m.

Zimbabwe pays Libya in local currency which is then used to invest in land and the banking, tourism, fuel, meat processing and construction sectors.

The reported failure of the key trade deal comes after Zimbabwean president Robert Mugabe indicated that the government was preparing to end the state monopoly of fuel supplies.

Petrol deregulation

Zimbabwe has suffered fuel shortages for over three years and most petrol stations in the capital Harare are reportedly shut due to shortages.

The southern African country's economic crisis and lack of foreign currency has led to the erratic fuel supplies.

Earlier this month Mr Mugabe said foreign oil companies operating in Zimbabwe should import their own supplies because the government was "foolishly helping" them earn huge profits while taking the blame for shortages.

Energy and Power Development Minister Amos Midzi confirmed last week government was working on deregulation.

Oil imports are heavily subsidized by the state, with petrol selling for 15 US cents per litre, the cheapest in the region.

Industry estimates put the cost of delivering a litre of oil to the landlocked country at $1.

Zimbabwe has maintained a state monopoly over the country's oil industry since independence in 1980.