The province of Saskatchewan and the city of North Battleford have agreed to pay $3.2 million to 700 people who became ill in 2001 after drinking tap water contaminated with a parasite.

The compensation package announced on Thursday is part of an out-of-court settlement that pays for the costs of pain and suffering, lost income, out-of-pocket expenses and legal fees endured by the victims.

The two levels of government will split the payout 50-50 and base the payments on the extent of the individual's suffering.

"This has been a regrettable episode for the people who became ill in North Battleford and it has served as a significant wake-up call for the province and for municipalities which deliver drinking water to their residents," said Saskatchewan Environment Minister Buckley Belanger.

In the spring of 2001, about 7,000 people suffered from vomiting, diarrhea and high fever when the parasite cryptosporidium seeped into their drinking water.

No one died as a result of the contamination.

Court documents revealed that the city of North Battleford had failed to properly test the drinking water, employed unqualified workers and built its water treatment plant two kilometres downstream from the sewage plant.

An inquiry concluded that the province's Environment Department was an "inadequate and ineffective" regulator.

Earlier this week, the city announced it will spend $15 million to build a new sewage treatment plant downstream of its drinking water intake.

Another settlement still is being negotiated with a second group of about 100 residents.