The Philippines government and separatist rebels have struck a deal on creating a Muslim homeland in the country's south which they expect will lead to a peace accord in August, officials said Thursday.

The agreement on the extent of territory to be handed over, known as "ancestral domain", which had been a stumbling block in the peace talks that opened in 2001, came after two days of negotiations in the Malaysian capital.

The land consists of untitled communal farms that came under formal state ownership when the Philippines became a Spanish colony in the late 16th century.

"We are confident that the momentum of signing the ancestral domain agreement will be able to carry us forward in the other tests and challenges ahead," said Philippines chief negotiator Rodolfo Garcia.

He said the agreement would be wrapped up with other elements into a "final peace agreement which we expect to be able to reach by the middle of 2008, by August of 2008."

The Malaysian hosts said that another round of exploratory peace talks would be held in December before formal discussions early next year.

"The successful outcome of discussions clears the way for the drafting of the memorandum of agreement on ancestral domain which shall be tabled at the formal talks scheduled for early 2008," said Malaysian facilitator Othman Abdul Razak.

The full peace deal is to cover three areas: security, rehabilitation and ancestral domain. In previous talks, the two parties have agreed on the security and rehabilitation issues.

Talks ended in a bitter impasse in September last year over the ancestral domain issue in the southern island of Mindanao, where the rebels have been waging a separatist rebellion since 1978.

Low-level and informal talks continued, despite sporadic clashes on the ground.

The Moro Islamic Liberation Front (MILF) signed a truce with Manila in 2003, paving the way for formal negotiations with the government of President Gloria Arroyo.