Foreign ministers from the South Asian Association for Regional Cooperation member countries agreed to create a free trade area in the region by 2006.

"An agreement was reached on the South Asian Free Trade Area during informal consultations among the foreign ministers," foreign secretary Shashank said.

A formal announcement to this effect is likely to be made at the three-day Saarc summit beginning in Islamabad on Sunday. The foreign ministers from the seven South Asian nations today held a meeting to prepare the ground for the summit.

The ministers also agreed on measures to combat terrorism and on a social charter meant to raise living standards in a region that is home to nearly a quarter of the world's people with an average annual income of $450.

"All this will contribute to achieving bilateral progress in the long term," Shashank said.

At present, trade among the Saarc countries is estimated at $6 billion per annum. But businessmen are optimistic that this can be raised substantially once the free trade area is set up. "We feel that it can be doubled every year once Safta is established," Confederation of Indian Industry deputy director-general Ajay Khanna said.

The establishment of the free trade area is the first step towards economic cooperation in Southeast Asia. Industry associations from India as well as Pakistan, the two largest economies in the Saarc region, have been demanding such an agreement despite sceptics saying a free trade zone will only help India. The unofficial trade between India and Pakistan is put at $1.5 billion.

Meanwhile, a new initiative in the form of the South Asia CEO's Forum was launched today. The forum, including participants from all the Saarc countries, held its first meeting through an audio-video conference, stressing free trade in the region by 2005.

Safta will be India's second free-trade agreement in recent months. In October last year, India had signed an agreement with Thailand seeking to establish free trade between the two countries by 2006.