Thursday June 21, 2007 | Michael Howard in Sulaymaniya

Iraq's Kurdish leaders said last night they had struck an important deal with the central government in Baghdad over a law to divide up Iraq's oil revenues, which is seen by the Bush administration as one of the benchmarks in attempts to foster national reconciliation.

Ashti Hawrami, the minister for natural resources in the Kurdistan regional government, told the Guardian the text had been finalised late last night after 48 hours of "tough bargaining" with Baghdad. The deal represented "a genuine revenue sharing agreement" that was transparent and would benefit all the people of Iraq and help pull the country together, he said.

Iraq's oil revenue accounted for 93% of the federal budget last year. Iraq sells about 1.6m barrels a day.

Mr Hawrami said the law provided for the setting up of two "regulated and monitored" accounts into which external and internal revenues would be deposited. The external account would include items such as oil export earnings and foreign donor money, while the internal fund would consist largely of customs and taxes. The federal government in Baghdad would take what it needed, and the rest would be automatically distributed to the Kurdistan regional government, which would get 17%, and to Iraq's governorates "according to their entitlement". Revenues would be distributed monthly, he said.

Mr Hawrami said the system would better enable Iraqis to track how and where the oil funds were being spent. The Kurds, for example, have complained that remittances to their self-rule region have been being held back by up to six months in Baghdad. Iraq's Sunni Arabs had also expressed concerns that they might miss out on their share.

Iraq's finance minister, Bayan Jabr, and the oil minister, Hussein Sharistani, were accompanying the president, Jalal Talabani, on a state a visit to China and could not be contacted for comment.

The new deal came days after a visit to Iraq by the US defence secretary, Robert Gates, during which he rebuked politicians for failing to reach consensus on sharing oil revenues. The US sees the deal as a benchmark of progress toward reconciliation.

A western diplomat in Baghdad said last night: "Fair-sharing of Iraq's oil revenue is important to finding a sustainable political solution in Iraq. But on its own it will not halt the sectarianism."