A United Nations body has agreed to let Iraq postpone its final payment of reparations to Kuwait for the 1990-91 Gulf War, in an effort to help ease Baghdad's cash-strapped budget.

The consensus decision, reached by major powers at the UN Compensation Commission (UNCC), means Iraq will have until January 2016 to begin paying its oil-rich neighbour $4.6 billion for oil fields destroyed during its invasion and seven-month occupation.

Iraq's economy is being battered by low oil prices and war with Islamic State militants who control the north and west, leading the government of Prime Minister Haider Al-Abadi to request the delay.

"The Governing Council adopted a decision agreeing to a postponement of Iraq's requirement to deposit five per cent of oil proceeds until January 1, 2016," Leah Kraft, legal officer of the UNCC, told Reuters.

In a statement issued after the closed-door special session, the UNCC said it had taken into account "the extraordinarily difficult security circumstances in Iraq and the unusual budgetary challenges associated with confronting this issue".

Quarterly payments derived from Iraq's oil and natural gas revenues would resume in 2016, it said.

Earlier on Thursday, state news agency Kuna reported that Kuwait said it accepted the Iraqi request related to reparations imposed by the UN Security Council.

"Iraq and Kuwait really negotiated this together at a high level," a Western diplomat told Reuters. "Iraq's finance minister wanted this to happen for the 2015 budget."

"The Kuwaitis have a good relationship with the new Iraqi government and want to see it succeed. They have a strong interest in regional stability," he said.

In 2000, the UNCC awarded $14.7 billion to Kuwait for oil production and sales losses incurred by the Kuwait Petroleum Corporation, $4.6 billion of which is Iraq's last debt, the UN statement said.

"Today, the Governing Council welcomed Iraq's ongoing commitment to paying this outstanding claim in full," it said.

More than 700 Kuwaiti oil wells were set on fire by Iraqi troops retreating from the US-led operation Desert Storm to recapture the emirate in January 1991. Some burned for 10 months.

Iraq has already paid nearly $50 billion into the UN fund overseeing compensation for looting and damage inflicted during Saddam Hussein's seven-month occupation of Kuwait.

But with its economy set to shrink for the first time since the 2003 US-led invasion toppled Saddam and ended sanctions, Iraq can ill afford to divert a large chunk of the 2015 budget to make the last payment that had been due next year.-Reuters