Libya's main legislative body has approved a law setting up a free trade zone on the country's Mediterranean coast, Saadi Gaddafi, a son of Libyan leader Muammar Gaddafi, said yesterday.

The zone will have free movement of capital and goods, its own courts and a stock exchange, and investors there will benefit from a 10-year tax holiday, according to a copy of the law seen by Reuters.

The idea of the free trade zone has been in development for several years, and a Dubai-based property developer had said it planned to be involved, but progress has been slow.

Saadi Gaddafi, a businessman who is likely to be director of the zone's board, said the free trade zone was needed to stimulate investment outside Libya's oil and gas sector.

"Although Libya has other sources, we still depend primarily on oil," he said in an interview.

"We have to take care of industry, foreign investment, tourism and we also have to search for other sources... anything that makes Libya depend on sources other than oil."

The zone will stretch about 100 kilometres along the Mediterranean coast from Mellitah, west of Tripoli, to the border with Tunisia.

Dubai-based developer Emaar Properties signed a memorandum of understanding with Libya in 2006 on setting up a joint venture to develop part of the free trade zone. The firm has not said if it is still committed to the project.

Many Gulf property firms have shelved investment projects because of the global economic downturn.

Libya has experienced a boom in foreign investment since it renounced banned weapons programmes and emerged from decades of international isolation. However, most foreign investment has gone into the oil and gas sector.

Investment outside the energy sector has been hampered by red tape and an unpredictable regulatory environment.

Saif al-Islam, another of Muammar Gaddafi's sons who is Libya's second most powerful figure, has been spearheading an effort at reform but that has been resisted by a conservative old guard, including some in his father's entourage.

Saadi Gaddafi said the law on the zone had been approved by his father, was backed by Saif al-Islam and had been approved by the Basic People's Congresses, Libya's main law-making body.

Under Libya's grass-roots system of government, decisions taken by the Basic People's Congresses are automatically passed into law by the General People's Congress, or Parliament.