By Manny Mogato

MANILA, Nov 9 (Reuters) - The Philippines will resume official talks with the country's largest Muslim rebel group next week after agreeing to compromise on the size and wealth of a proposed homeland, the government said on Friday.

Rodolfo Garcia, the government's chief peace negotiator, said both sides were hopeful that a deal on creating an ancestral homeland for 3 million Muslims in the south of the mainly Catholic state would be signed early next year.

"We have overcome a very contentious issue on territory and we're very optimistic that we might be able to hammer out an ancestral domain agreement by early 2008," Garcia told Reuters.

The two sides have agreed on boundaries for the homeland and how to share wealth from the region's mineral deposits, forests and farmlands.

Garcia, a retired army general, declined to say how large the territory would be or how the wealth would be divided. The breakthrough, after more than a year of stalemate, was made last month in informal talks sponsored by the Malaysian government.

Muslims in the south of the Philippines have been fighting for their own territory for decades. The insurgency has killed 120,000 people and displaced at least 2 million since the late 1960s.

It has also stunted development in one of the most resource-rich parts of the archipelago with large deposits of gold, nickel and copper.

Garcia said his team would now officially meet with negotiators from the Moro Islamic Liberation Front (MILF) in Kuala Lumpur on Nov. 14-15 to discuss maritime resources and boundaries and residual territorial issues.

Mohaqher Iqbal, the head of the MILF negotiating team, gave credit to the "shuttle diplomacy" of Malaysia, which has around 50 soldiers on peacekeeping duty in the southern Philippines, for last month's breakthrough.

"It's like trying to hammer down a piece of steel, constant blows would make it give in," Iqbal told Reuters.

Australia, Canada, the European Union, New Zealand, Sweden, the United States and the World Bank have promised to provide hundreds of millions of dollars to rehabilitate war-torn areas once a peace deal is signed.

Differences over territory as well as congressional elections in May, which distracted the government, and mistrust on the part of the rebels, who fear signing a botched deal, held up talks.

But Garcia said both sides realised the need to meet halfway.

"Both sides cannot hold on to their trenches, their own so-called Maginot line," Garcia said, referring to the French system of fortifications which failed to halt the advances of Nazi Germany in World War Two.

"We have to come to mutually acceptable ground, I guess one side would have to give, perhaps, more than the other." (Reporting by Manny Mogato, editing by Carmel Crimmins)

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