Italy agreed Saturday to pay Libya $5 billion US as compensation for its 30-year occupation of the country, which ended in 1943.

Italian Prime Minister Silvio Berlusconi and Libyan leader Moammar Gadhafi signed a memorandum pledging a $5 billion US compensation package involving construction projects, student grants and pensions for Libyan soldiers who served with the Italians during the Second World War.

"It is a material and emotional recognition of the mistakes that our country has done to yours during the colonial era," Berlusconi told reporters at the airport on his arrival. "This agreement opens the path to further co-operation."

In return, Italy wants Libya to crack down on illegal migrants turning up on Italian shores, and Italy will fund $500 million US worth of electronic monitoring devices on the Libyan coastline.

Gadhafi received Berlusconi under a big tent in Benghazi where they discussed the agreement over lunch. The Italian leader said $200 million US of the package would be for infrastructure projects over the next 25 years, including a coastal highway stretching across the country from Tunisia to Egypt.

The two leaders exchanged gifts, with Berlusconi giving Gadhafi a silver inkstand, sculpted in the form of a lion's head, with two pens inside with which to sign the agreement. The Libyan leader gave Berlusconi a linen suit.

Berlusconi's office said in a statement that the premier would also hand over to Gadhafi the Venus of Cyrene, an ancient Roman statue taken in 1913 by Italian troops from the ruins of the Greek and Roman settlement of Cyrene, on the Libyan coast.

Relations between the two countries have warmed over the last few years, with Italian leaders meeting Gadhafi several times. However, it has taken years of negotiations for the two sides to reach a deal on compensation for Italy's rule over Libya from 1911 to 1943.

Libya named Aug. 30 Libyan-Italian Friendship Day.