"It's a very significant agreement because it means that there will be substantial reductions in the emissions of harmful sulphur by ships," Simon Bennett, secretary at the International Chamber of Shipping, told Reuters.

"There is going to be much greater demand in the use of distillate fuels, particularly in the years running up to 2015," he said.

Distillate fuels such as diesel are much less polluting than the heavy residual fuel oil now widely burned in ships.

The week-long talks also tackled how best to reduce emissions of carbon dioxide, either by imposing a fuel tax or including shipping in a cap and trade scheme forcing owners to buy permits to emit the greenhouse gas.

IMO spokeswoman, Natasha Brown, said that the issue of global warming gases had been discussed at length there had been "no specific conclusion" on market-based instruments.

She said more talks would take place at an intersessional meeting on green house gases in March ahead of another IMO Marine Protection Committee meeting July.

"I think this is a positive sign of an intent by the IMO member states to produce a reasonable CO2 reduction framework," said ICS marine director Peter Hinchcliffe of technical progess made at the meeting.

TOUGH TARGETS

Through the IMO, which governs shipping, countries agreed to cut sulphur limits in so-called special Sulphur Emission Control Areas (SECA) to 0.1 percent by 2015 from the current 1.5 percent.

Worldwide, excluding SECA, the sulphur content limit is 4.5 percent.

The tightening is needed to curb toxic sulphur emissions along coastlines where they have been a major health hazard, especially in heavily populated areas.

In the protected SECA zones, by 2010 sulphur will be limited to just 1 percent.

Some two-thirds of the movements of the 50,000-strong merchant fleet, which carries 90 percent of the world's traded goods by volume, are in coastal areas.

There are now only two SECA -- the North Sea and the Baltic -- but it is expected that European Union countries, the United States, Japan, Singapore and Australia will be declared SECA by 2015.

In tandem with the SECA targets, the industry agreed to cut SO2 spewed out globally, including in the middle of the ocean, to 0.5 percent by 2025 from the current 4.5 percent.

Bennett said that the ambitious targets, first formally aired in April, would probably cost the oil and shipping industry billions of dollars to implement.

They could also raise the price of road transport fuels as the industry switches from heavy fuel oil to distillates.

"The big question will be whether or not the oil refining industry will be able to deliver this new demand for distillate that is going to be created for shipping," Bennett said. (Reporting by Stefano Ambrogi; editing by Anthony Barker)