The Libyan government plans to lay off 400,000 people, or more than a third of its workforce, to try to ease budget pressures and stimulate the private sector, Prime Minister al-Baghdadi Ali Al-Mahmoudi said.

Mahmoudi told the General Peoples Congress or parliament on Saturday the number of civil servants and state employees had grown excessively to more than one million in recent years and their salaries ate up 4 billion dinars ($3.13 billion) in 2006.

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Outlining a 31 billion dinar draft budget for 2007 at the assembly in the town of Sirte, Mahmoudi said those who lost their jobs would receive assistance.

"Each released public employee will be given his full salary for three years or will be granted up to 50,000 dinars in loans for each one who wants to start his own business," he said in a speech broadcast on national television.

"The objectives of this budget are to increase Libyans' standard living by the rate of 5 percent during this year and to promote productive activities," he said without elaborating.

Mahmoudi added that he wanted to improve health and education and encourage the private sector to make manufactured goods of sufficient quality to compete with imports.

Libyan leader Muammar Gaddafi regularly scolds the north African OPEC member country of 5 million for over-reliance on oil, which is the source of almost all Libya's hard currency earnings.

Gaddafi also says Libyans are too dependent on foreigners and imports of consumer goods.

He is pushing for more economic self-reliance and private sector-friendly reforms to fight an unemployment rate of at least 13 percent.

The state-dominated economy has long been enfeebled by international sanctions, old-fashioned centralized management, a primitive banking sector, corruption and red tape.

But hopes of change have risen with the revival of diplomatic relations with Washington.

In May 2006, the Bush administration said it would restore formal ties with Tripoli as a reward for Libya's scrapping of its weapons of mass destruction programme.

While most U.S. sanctions were lifted in 2004, the revival of formal ties is expected to loosen a remaining web of financial curbs placed on U.S.-Libya investment in the decades of estrangement when the West accused Libya of supporting terrorism.