SUDANESE President Omar Hassan al-Bashir said on Friday Khartoum will not seek international arbitration in a dispute with South Sudan over Juba's takeover of oil assets when it won independence in 2011.

Sudan was previously seeking $1.8 billion as compensation after South Sudan's state oil company Nilepet took over assets once owned by Sudan's state firm, Sudapet. South Sudan had said it would not pay that amount.

"As a show of good faith, and in response to their request, I announce that Sudan has dropped its arbitration suit," Bashir told the African Union's Peace and Security Council.

South Sudan had asked its northern neighbour to drop the case altogether as a condition for supporting Khartoum's bid to have its roughly $40 billion worth of external debt cancelled.

"Sudan is willing to continue the negotiations with the government of South Sudan aiming at reaching an amicable solution of the issue," Bashir told the gathering of heads of state, including his southern counterpart, Salva Kiir.

Sudan told the U.N. General Assembly last year that its debts must be cancelled and its economy supported as it struggled to recover from losing three-quarters of its critical oil revenue to South Sudan when the latter seceded a year ago.

The International Monetary Fund has urged Khartoum to meet donors to discuss debt relief. Some IMF board members called for "exceptional efforts" from the IMF and the global community to help Sudan reduce its debt.

Sudan and South Sudan are at loggerheads over a litany of disputes following the secession of the south.

The spillover from unresolved tensions brought the two neighbours close to war in April in the worst border clashes since the south seceded under a 2005 deal ending decades of civil war.

Both countries agreed in September to set up a demilitarised buffer zone and resume oil exports from landlocked South Sudan through Sudan. Oil is vital to both economies.

South Sudan, which says Sudan often bombs its territory, shut down its entire oil output of 350,000 barrels per day a year ago after failing to agree on export and transit fees with Khartoum. It had hoped to be producing 230,000 bpd by December.

But neither side withdrew its army from the 2,000-km (1,200-mile) border due to mistrust left from one of Africa's longest civil wars.

To end the stalemate, the AU brought together Bashir and Kiir twice this month in Ethiopia. Despite a series of discussions on how to set up the buffer zone, as agreed by the presidents, both sides accused each other of making new demands.

The Council "stresses the need for both countries to implement all the agreements ... unconditionally, and with the utmost urgency," said Ramtane Lamamra, the Peace and Security Council's commissioner.

While urging both sides to continue talks, the AU's PSC gave its mediating panel another six months before it submits its final report to the pan-African bloc.

The two foes will resume talks on Feb. 15 in the Ethiopian capital.

Reuters