(Updates with leaders' comments)

By Alexander Rheeney

PORT MORESBY, March 6 (Reuters) - Australian Prime Minister Kevin Rudd made his first official visit to Papua New Guinea on Thursday to repair ties with South Pacific island nations and promote security and democracy in the troubled region.

Rudd, who won power last November, met Prime Minister Michael Somare in Port Moresby, with the two leaders promising a new era of cooperation after relations between the two nations broke down under Australia's former conservative government.

"The past few years, things have not worked out as we expected," Somare told reporters at a joint media conference in Port Moresby. "That is all water under the bridge now. This is the beginning of our revised and new relationship."

Rudd and Somare signed new agreements on Australia's approach to aid for South Pacific nations, and on climate change, which could see Australian companies in future offset carbon emissions by investing in PNG's tropical rain forests.

Australia is the biggest aid donor to PNG, spending A$355 million ($332 million) a year in the Melanesian country of about 6 million people, most of whom live a subsistence village life despite the country's vast mineral wealth.

Rudd said the new aid agreement with PNG and other Pacific islands nations would ensure a more cooperative approach to aid spending after complaints Australia's former conservative government used aid to enforce its will on smaller nations.

"We are carving out a new chapter in the relationship with PNG, we are carving out a new framework for our relationship with the rest of the Pacific island countries," Rudd said.

On Saturday, Rudd will visit the nearby Solomon Islands, where Australia has about 200 police and troops as part of an international mission sent in 2003 to maintain law and order after the country nearly collapsed.

Australia considers PNG, the Solomon Islands and Fiji to be part of an arc of instability due to volatility, crime and ethnic violence in the region. Fiji, for instance, has had a series of coups and army rebellions since 1987.

Australia's former government angered Pacific island nations with its determination to stamp out corruption under an interventionist policy designed to stop states from failing and becoming havens for criminals and foreign militants.

FOREST PARTNERSHIP

Under the new carbon-forestry agreement, Australia will offer the use of satellites to PNG's 29 million hectares (71 million acres) of tropical rainforests and will help the country find ways to reduce deforestation.

Rudd also raised the prospect that PNG could eventually become part of an Australian carbon-trading market, due to be operating by 2010, allowing Australian companies to in future invest in PNG forest projects to offset carbon emissions.

"PNG doing its bit for the world through avoided deforestation is very important," Rudd said. "But there has to be some return for PNG."

The former Australian government under prime minister John Howard had also wanted to send police to PNG to help control crime and violence, but the plan was shelved when the country refused to offer the police immunity from prosecution.

Somare's government has put the police deployment back on the agenda since Rudd's election, but wants the police to be under the command of the PNG government.

Somare and Rudd said foreign ministers would continue talks on police deployments at a ministerial meeting in April. (Writing by James Grubel; Editing by Michael Perry and Sanjeev Miglani)

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