However, the Government's paper endorses a range of options for regional consolidation, urging other Pacific nations to consider "the merits of a regional approach to monetary and exchange rate policy". It says the approach could involve the creation of a regional central bank and single currency, a currency board and "dollarisation" of the region.

The Senate report had called for a single currency and common labour market in the Pacific as a way to prop up small, failing states. The new briefing paper also calls for pooling of regional resources in justice and security-related areas. It advocates "a regional unit to respond to complex transnational crime and terrorism issues". A regional financial intelligence unit to oversee and investigate financial transactions and police money laundering is proposed.

New legal and administrative structures to allow rapid regional responses to law and order breakdowns - such as the Australian-led intervention in the Solomons - are also supported by the paper. The paper calls for the strengthening of the Pacific Islands Forum, the main regional institution, and amalgamation of key services, including the possible establishment of a regional airline.

Pacific governments would find it increasingly difficult to maintain "all the sophisticated arms of modern government", the paper says. "Millions of dollars have been allocated from small national budgets to support chronically loss-making public enterprises. This has drained resources away from funding basic services." Australia's plans for the Pacific have been aided by the election of former diplomat Greg Urwin as secretary-general of the forum on Saturday, in the face of stiff regional resistance. Mr Howard put his credibility on the line to secure Mr Urwin's win, telling a private meeting of Pacific leaders he would be "wounded" if they decided an Australian should not lead the regional body.

Leaders were concerned that Australia would scale down its commitment and aid to the region if Mr Urwin was not selected. However, Mr Howard's push for regional amalgamation, better governance and a crackdown on corruption - linked to aid payments - is still facing strong opposition.

Papua New Guinea is easily the biggest recipient of Australian aid, receiving more than $300 million a year. Prime Minister Michael Somare told The Age Mr Howard had to back off in the face of regional resentment. Pacific corruption was being blown out of proportion by Australia, he said. PNG would not allow Australian administrators to oversee its government's spending of Australian aid money, Sir Michael said. "I would not agree because you are contravening a sovereign state; why don't you allow us to do our own thing, learn from our own mistakes as we go along and improve upon our mistakes.

"I say, Prime Minister of Australia, you have to be fair in the comments you make about developing states. I was able to put thousands of tribes together to make a sovereign state today and no one gives us any credit about what we've done ourselves."