Aug. 30 (Bloomberg) -- Italian Prime Minister Silvio Berlusconi pledged $5 billion over 25 years to Libyan leader Muammar Qaddafi in compensation for the occupation of the country in the 30 years before World War II.

Italy will pay $200 million per year to Libya in the form of investments in infrastructure. The money will finance the construction of a coastline highway that runs about 1,600 kilometers (994 miles) between the Egyptian and Tunisian borders.

``It's a full moral recognition of the damage done to Libya during Italy's colonial period,'' Berlusconi said after arriving at the airport in the Libyan city of Benghazi, where the two leaders met to sign the accord. ``This will end 40 years of misunderstandings.''

A spokesman traveling with Burlusconi confirmed the comments, which were originally reported by Ansa news agency.

Italy occupied Tripoli in 1911, seizing it from the Turks and the crumbling Ottoman Empire, and held it until the Allies took over in 1943. The Italian military controlled the city under the dictator Benito Mussolini. In 1970 Qaddafi expelled Italians still living in Libya and confiscated their property.

In exchange for settling the dispute, Libya will increase patrols of its coastline to prevent boatloads of African immigrants from traveling to Sicily. Italian companies, including oil and gas company Eni SpA, will also be able to expand their business in Libya, Ansa said.

To contact the reporters on this story: Steve Scherer in Rome at scherer@bloomberg.net

Last Updated: August 30, 2008 10:00 EDT