Libyan leader Muammar Gaddafi and Italian Prime Minister Silvio Berlusconi met in Libya on Saturday to sign a "friendship pact" under which Italy will pay billions of dollars in investments and compensation for its colonial rule of the North African country.
The accord should remove the latest hurdle to an improvement in ties between Italy and Libya, a major energy producer.
The two leaders met in a tent in the eastern city of Benghazi.
"Prime Minister Berlusconi expressed his joy that Libya and Italy will sign the friendship and cooperation deal which will close the files of a painful colonial past," Libyan state television said.
Libya accuses Italy of killing thousands of Libyans and driving thousands more from their desert villages and cities on the Mediterranean coast during its 1911-1943 colonial rule.
Berlusconi said on arrival that under the deal $200 million (110 milion pounds) per year will be invested by Italy in Libya over 25 years,"
"Italian companies will set up more business in Libya," he added, without giving details.
Italian officials said earlier the deal covered "some billion dollars" in compensation and $5 billion in investments, including the construction of a highway across Libya from the Tunisian border to Egypt.
It also involves a project to clear mines dating back to the colonial era.
Italy expects in return to win energy contracts and for the Tripoli government to toughen security measures to stem the flow of illegal migrants, including joint maritime patrols, Reuters reported.