ABU DHABI (Reuters) - The Gulf state of Qatar, a key U.S. ally, said Tuesday, following talks with Washington's Iraq debt envoy, that it would waive most of the $4 billion or so Iraq owes it and will consider writing off the rest.

"The state of Qatar will forgive most of the debts Iraq owes it and will consider waiving the remaining amount at a later, more appropriate time," a Qatar Foreign Ministry official said following talks between Crown Prince Sheikh Tamim bin Hamad bin Khalifa al-Thani and the U.S. envoy James Baker.

"Reducing debt in 2004 is a crucial and defining issue and provides Iraqi people a chance to build a free and prosperous country," the Qatari official told the state news agency QNA.

Iraq owes Qatar about $4 billion that has accrued since the 1980s, another official told Reuters.

Iraq is estimated to owe Gulf countries $45 billion, mostly money given to Baghdad during its 1980-1988 war with Iran. Iraq insists the money from Saudi Arabia and other Gulf states was given as grants...