The agreement is the first time the Southeast Asian neighbours have settled one of several major bilateral disputes and senior officials from both sides said they were now optimistic the other issues could also be amicably resolved.

"I consider this as a milestone in Malaysia-Singapore relations," Malaysian Foreign Minister Syed Hamid Albar said at a news conference here during the signing ceremony for the agreement.

"My government and I are very delighted that our two countries have been able to reach an amicable solution through a settlement agreement."

The deal allows Singapore to continue reclamation works in the narrow Straits of Johor, a busy international waterway that divides the two nations, while cooperating with Malaysia to ensure navigational safety and environmental protection.

Singapore will modify the design of the shoreline of its reclamation works so the waterway is wider than originally planned in one section, as recommended by a group of independent experts set up by the two countries.

Syed Hamid said the agreement, reached after almost two years of talks between officials from the two countries, showed "there is nothing impossible if we move our hearts and minds" to seek a resolution.

His Singaporean counterpart, George Yeo, was equally upbeat and expressed hopes the friendly atmosphere between the two neighbours during the negotiations could be extended to resolve the outstanding disputes.

"With the signing, we will be closing an old chapter on a bilateral dispute which began during a period of more troubled bilateral relations but ends today in an atmosphere of warmer bilateral cooperation," Yeo said.

"The civil and civilised manner in which we have been able to settle this dispute gives us confidence that our other bilateral disputes can be settled in the same way."

The two nations have endured an uneasy relationship since Singapore's ejection from the Malaysian federation in 1965.

But strong signals of a rapprochement have emerged since former Malaysian prime minister Mahathir Mohamad's retirement in 2003.

Other disputes that have yet to be settled include Singapore's military access to Malaysian airspace, the future of Malaysian-owned railway land inside Singapore and rival claims to a rocky islet.

Reclamation negotiations became deadlocked under Mahathir in 2002, but his notoriously confrontational negotiating style was replaced by the more diplomatic approach of his successor, Abdullah Ahmad Badawi.

As part of the compromise deal, Malaysia withdrew its case before the International Tribunal for the Law of the Sea and Singapore agreed to make adjustments to the reclamation work.

Singapore also agreed to pay Malaysian fishermen 98,526 US dollars as compensation for losses as a result of the reclamation works.

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