The decision awards more or less half of the disputed Caribbean territory, which contains rich fishing grounds and potential oil and gas reserves, to each Central American nation.

The boundary line now makes a slight detour around the islands which Honduras gained sovereignty over and settles the dispute which nearly led to armed conflict in 1999.

The ruling, cheered by both countries, also clears the way for Honduras to offer concessions to explore for oil and gas off its Caribbean coast, with a view to easing its reliance on costly oil imports.

The presidents of Honduras and Nicaragua, Manuel Zelaya and Daniel Ortega, were due to meet in the Nicaraguan border town of Ocotal on Monday to endorse the court's decision.

"We have no objection and Nicaragua has committed to the same," Mr Zelaya said, adding that the ruling should bring Central Americans closer together.

The International Court of Justice (ICJ), or World Court, hears disputes between states and its rulings are binding and without appeal.

It ruled Honduras has sovereignty over the contested islands of Bobel Cay, Savanna Cay, Port Royal Cay and South Cay, which lie east of the nations' land border, an area struck by the devastating Hurricane Felix in early September.

"We are very pleased. The court has solved a situation which was generating conflict," said the Honduran ambassador to the United States, Roberto Flores Bermudez.

Nicaragua first filed a claim with the court in 1999 asking it to determine the border in the Caribbean Sea, which it said had never been established. Honduras said it was set by the king of Spain in 1906 and upheld by the World Court in 1960.

The two countries, among the poorest in Latin America, have bickered on and off about land and sea boundaries since the end of Spanish colonial rule in the 1820s.

"I feel very happy with the results ... Nicaragua has gained substantial territories and in that respect we are very happy," said Carlos Jose Arguello Gomez, Nicaragua's ambassador to the Netherlands.

"The important thing is that the problem between the two countries has finished."

Nicaragua and Honduras were foes for much of the 1980s when the United States beefed up Honduras' military and used its main Central American ally as a base for the Contra rebels it funded to fight Nicaragua's Marxist government.

After Nicaragua filed the claim with the ICJ both countries built up troops along their land border and sent vessels to the disputed waters, although they later agreed to establish a zone of military exclusion pending the court's decision.