Kuwait said on Wednesday that Iraq will complete payment of a $500 million settlement of an airline dispute between the two nations by the middle of next year.

A royal decree ratifying the settlement signed by Kuwait Emir Sheikh Sabah al-Ahmad Al-Sabah states that Baghdad will pay $200 million in the first six months of 2013.

The remaining $300 million will be deposited in a special bank account and transferred to state-owned Kuwait Airways Corp.

The decree said the deal between the two neighbours' airlines was signed in Kuwait City in July and officially ends a 22-year old dispute which began after Iraqi troops invaded Kuwait in 1990.

The settlement amounts to less than half of the $1.2 billion Kuwait Airways had said Iraq's flag carrier owed it. Kuwait says 10 of its planes as well as aircraft parts were plundered after its airport was seized during the invasion.

The Kuwaiti decree is effective from the day it is published in the official gazette, though under the emirate's constitution, the next parliament, due to be elected on December 1, has the right to reject it.

An Iraqi foreign ministry statement said on Tuesday that the decree "cancels all restrictions and complications in rebuilding Iraqi Airways, and it is now free to buy new planes and build a fleet."

Iraq invaded Kuwait in 1990, after which flights between Iraq and its small neighbour to the south were suspended. Authorities earlier this year gave approval for direct flights between the two countries to resume.

Several outstanding issues are still to be sorted out between the two Arab neighbours including the payment by Baghdad of around $20 billion in war reparations and about $16 billion in debt.