The annual package from the federal government for health, education and other spending was larger than the AU$11 billion states had been seeking.

It comes on top of AU$10.4 billion that Mr Rudd pledged to pour into the economy in October to protect it from the financial meltdown, carving a huge hole in a budget surplus that was projected for the current fiscal year.

Mr Rudd said the federal government could fund the new package and still maintain a 'modest' budget surplus.

Queensland Premier Anna Bligh told reporters that the extra funds are 'an investment straight into the economy to keep the motor running.'

More than AU$3.5 billion would be spent on schools, funds that would go toward Rudd's goal of ensuring every high school student has access to a computer.

The health sector would get an extra AU$1 billion to train more doctors and other health professionals, and AU$750 would go to improving hospital emergency services.

Funding agreements were also struck on federal spending for health and housing for Australia's indigenous Aborigines, as well as homelessness and disability services.

In Australia, state governments are responsible for running state schools, hospitals and other services. While states have their own taxes, a national sales tax and other imposts are collected by the federal government, which then distributes some of the revenue back to the states.

The Treasury Department predicts the global downturn will drain about AU$40 billion from the government's purse over three years, and economic growth will slow to 2 per cent for the current year. -- AP