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Syria's President Bashar al-Assad could be exiled as part of a deal between Russia and the West to combat the rise of Islamic State, under plans being discussed at the G7 summit in Germany.

Despite tensions with Russia over Ukraine, sources at the summit suggested there was new common ground between the West and Moscow on the need for a diplomatic solution to the impasse in war-torn Syria.

The deteriorating situation in both Syria and Iraq dominated last night’s leaders’ dinner at the Schloss Elmau resort, while it also figured in bilateral talks between David Cameron and President Obama yesterday.

Downing Street said after the meeting that while significant problems remained, the potential for a deal which would see limited regime change in Damascus was greater than it had been for more than a year.

“We don’t want to overplay it, but there is a greater sense that a political solution is possible than there has been for many months,” the source said.

The continued success of IS against Assad’s troops, along with the failure of the Western-backed so-called moderate opposition, has led both Russia and the US to conclude that the only way to take on IS in the long term is to accept the need for a new government in Damascus that is broadly acceptable to both countries. Such a deal could result in Assad being granted asylum outside the country, but with large parts of the current regime remaining intact under the new leadership.

No 10 confirmed that IS had dominated the hour-long discussion between Mr Obama and Mr Cameron, adding: “There was a pretty frank and realistic exchange about the situation on the ground in terms of the moderate opposition and their ability to take or be holding ground from either the regime or from [IS].

“But they were both a bit more optimistic about the political process. The idea is that it might be possible to work with the Russians on a transition with a different leadership in Syria.

“The Prime Minister has spoken to President Putin about this and it was also discussed by the American Secretary of State John Kerry when he visited Russia recently.

“We wouldn’t overplay it. We realise that there is still a long way to go.” Compromise with Russia over Syria is unlikely to result in any immediate relaxation on Ukraine. The G7 is expected to make a statement today urging the European Union to maintain sanctions against Russia.

There is also expected to be progress announced on a new $100 billion fund to help developing countries tackle climate change, which is seen as a key objective of German Chancellor Angela Merkel, the summit host.