Japan has agreed in principle to write off 690 billion, yen or 80 percent, of Iraq's $7.3 billion debts to Tokyo, and the rest will be repaid over 23 years with a six-year deferment, government sources said Saturday.

The agreement paves the way for the resumption of Japanese government loans of up to $3.5 billion to help with the reconstruction in Iraq. The two sides are expected to conclude a formal agreement on the debt relief by the end of the year, the sources said.

The deal came after several working-level meetings following an agreement in November 2004 by the Paris Club of 19 creditor nations to write off Iraq's foreign debts.