ADDIS ABABA/JUBA South Sudan is offering Sudan a $3.2 billion (2.06 billion pounds) compensation package to help plug its rival's gaping budget deficit and higher oil export fees in an attempt to revive stalled talks, a senior southern official said on Monday.
But Sudan insisted it wanted to agree on border security first before discussing any oil or financial deal, in the latest setback for African Union efforts to end hostilities.
Both countries came close to all-out war when border fighting escalated in April, the worst violence since South Sudan declared its independence from Sudan a year ago.
The duo's messy divorce was part of a peace deal that ended decades of civil war.
But the split left a long list of unresolved disputes over the position of their shared border, how much South Sudan should pay to transport its oil through Sudan, and other issues.
Pagan Amum, South Sudan's chief negotiator, said Juba tabled its "last offer" on Sunday ahead of an August 2 U.N. Security Council deadline that threatens sanctions against the two countries unless they resolve all issues.
The proposal includes compensation of $3.2 billion, up from a previously offered $2.6 billion, to help Sudan make up for the loss of three-quarters of its oil production when South Sudan split away. Oil was Sudan's main source of revenues.
Juba also said it would forgive $4.9 billion - both for what it calls overdue oil payments before independence, and for oil confiscated after independence by Sudan. Sudan took some southern oil after failing to agree on a fee, prompting Juba to turn off all wells in January.
Landlocked South Sudan also offered to pay $9.10 and $7.26 per barrel to transport oil through two Sudanese pipelines. Southern officials said both figures were higher than an earlier offer but they were still short of Khartoum's last demand of $36 a barrel for both pipelines.
"This is our last offer. We are left with nine days (before the U.N. deadline). It's time for the parties to conclude an agreement," Amum told reporters.
Sudan insisted it wanted to discuss border security first before any oil deal. "This (security) is a priority that has been set by the agreement of the two parties and by the facilitation of the mediation," said Mutrif Siddiq, spokesman for Sudan's delegation in Addis Ababa where talks take place.
He also disputed Juba's figures and said Sudan owed no money to the South. "It (the offer) was meant to inflate the amount of money that South Sudan wants to say it has paid (for oil transportation in the past)," he said.
Sudan accuses South Sudan of supporting rebels in two southern border states and the Darfur region, a claim that some diplomats find credible despite denials from Juba.
South Sudan itself accuses its neighbour of bombing its territory. Sudan routinely denies these claims but Reuters reporters have witnessed several air strikes.
Diplomats had hoped a meeting by Sudan's President Omar Hassan al-Bashir with his southern counterpart Salva Kiir on the sidelines of an AU summit a week ago would give talks a push.
But Amum said they are yet to make progress. Talks have broken down several times over where to set up a demilitarized border buffer zone - seen as a first step to ending hostilities.
Amum said he wanted an arbitration body to resolve a dispute over the position of their shared border.
"We favour international arbitration. This, we believe, is the best amicable way," Amum said.
Sunday's offer also includes a new proposal to hold a referendum, organised by the AU and the United Nations, on the status of the disputed Abyei region.
(Additional reporting by Ulf Laessing in Khartoum; Editing by Andrew Heavens)