Cornelia Rau, a legal permanent resident in Australia, was held behind bars for more than 10 months in 2004 and 2005 when officials picked her up and wrongly assumed she was an illegal immigrant.

After the bungle was discovered the mentally-ill woman launched legal action for compensation from the government of then prime minister John Howard, which had adopted a hard line against illegal immigrants.

New Immigration Minister Chris Evans, who took on the portfolio when Howard's government was ousted in November, said his department had negotiated a deal to pay Ms Rau 2.6 million dollars (S$3.3 million).

He said the deal, which also covers Ms Rau's legal bills, met an election commitment by the centre-left Labour government of Prime Minister Kevin Rudd to quickly settle the matter.

'Rau's protracted compensation claim is one of the many regrettable immigration legacies of the former Howard government that we are committed to resolving,' he said. -- AFP