The Philippine government and Muslim rebels have agreed a peace deal to end a 40-year conflict that has killed more than 120,000 people, President Benigno Aquino said on Sunday, paving the way for a political and economic revival of the country's troubled south.

The agreement sets in train a roadmap to create a new Bangsamoro autonomous region in Muslim-dominated areas of the south of the mainly Roman Catholic country before the end of Aquino's term in 2016. Bangsamoro refers to Muslim and non-Islamic minority people in the southern Philippines.

Expectations are high that after nearly 15 years of violence-interrupted talks, both the government and the country's largest Muslim rebel group will work side-by-side to realise the promises contained in the agreement, to be signed on October 15 in Manila and witnessed by Aquino and Malaysian Prime Minister Najib Razak.

The two sides reached the deal for the resource-rich region during talks in the Malaysian capital of Kuala Lumpur.

"This agreement creates a new political entity and it deserves a name that symbolizes and honors the struggles of our forebears in Mindanao and celebrates the history and character of that part of our nation. That name will be Bangsamoro," Aquino announced via a live broadcast from the presidential palace.

"This framework agreement is about rising above our prejudices. It is about casting aside the distrust and myopia that has the plagued efforts of the past," said Aquino, surrounded by his cabinet ministers.

While obstacles still lie ahead, the deal signals a major breakthrough in trust between the government and the Moro Islamic Liberation Front (MILF) separatists, who have long viewed Manila's motives in the talks with suspicion.

Zainuddin Malang, executive director of the Mindanao Human Rights Action Cente, a civil society group monitoring an existing truce in the region says the two sides must take extra caution in their next steps.

"This agreement is merely an opportunity to end the conflict. The actual end of the conflict can only come from its successful implementation. We can only hope this agreement won't suffer the fate of prior agreements," Malang said.

"What is very important here is that we have a president who has so much political capital, backing the framework agreement, so the chances are higher to end the conflict."

NEW OPPORTUNITIES

The deal comes as the Philippines defies its reputation as an economic laggard with strong growth and a resurgence in investor interest.

The south's volatile and often violent politics could still hamper the plans. There is a risk that radical Islamic factions could split off from the MILF and continue fighting in a region that has a history of links with al Qaeda militants.

Another threat comes from powerful clans who control some areas in the region and may fear a loss of political influence.

After four decades of conflict, the MILF leaders are ageing and, analysts say, eager to see some fruit from the years of peace negotiations.

The leadership may also be motivated by the prospect of royalties from huge untapped deposits of oil, gas and mineral resources in rebel areas, part of an estimated total of $312 billion in mineral wealth in Mindanao.

France's Total has partnered with Malaysia's Mitra Energy Ltd. to explore oil and gas fields in the Sulu Sea off Mindanao.

The deal will set up a 15-member Transition Commission, which has until 2015 to draft a law creating the new entity to replace the current autonomous region.

The new entity and its jurisdiction will be determined through a plebiscite after the passage of the organic law.

The Muslim area will gain more political and economic powers, including imposition of taxes to cut central government subsidies, a bigger share in revenues from natural resources and a more active role in internal security.

"This framework agreement paves the way for a final, enduring peace in Mindanao," Aquino said. "It brings all former secessionist groups into the fold; no longer does the Moro Islamic Liberation Front aspire for a separate state.

"This means that hands that once held rifles will be put to use tilling land, selling produce, manning work stations, and opening doorways of opportunity for other citizens."