Gadhafi received Berlusconi under a big tent in Benghazi where they discussed the agreement over lunch. The Italian leader said US $200 million 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.

Italy's Prime Minister Silvio Berlusconi (2nd L) and Libya's leader Muammar Gaddafi (2nd R) sign an accord in Benghazi August 30, 2008. Libya and Italy signed an accord on Saturday under which Italy will pay billions of dollars in compensation and investments for colonial misdeeds during its decades-long rule of the North African country. [Agencies]

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 to sign the agreement. The Libyan leader gave Berlusconi a linen suit.

Berlusconi's office said in a statement that the premier would 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.

Berlusconi said the accord follows "those tragic and dramatic moments of the Italian occupation of your country."

"In the name of the Italian people, as head of government, I feel it is my duty to offer an apology and make plain our sorrow for that which happened so many years ago, and which affected so many of your families," the Italian premier said.

Libya named August 30 Libyan-Italian Friendship Day.