Italy is to provide $US5 billion to Libya as part of an apology for damage inflicted during the colonial era.
Prime Minister Silvio Berlusconi is in the port of Benghazi to meet the Libyan leader, Colonel Muammar Gaddafi, and seal a bilateral friendship and cooperation accord.
The accord will provide for $US200 million per year over the next 25 years through investments in infrastructure projects in Libya.
Formerly a part of the Ottoman Empire, Libya was occupied by Italy in 1911 before becoming a colony in the 1930s. The country gained its independence in 1951.
Italy and Libya have spent years negotiating a treaty to cover compensation for Rome's military occupation and colonisation.
Mr Berlusconi said on Friday that a coastal motorway from the Tunisian border to Egypt will be among the major projects to be financed by Italy.
Italy has also returned a Roman statue of the goddess Venus dating to the second century which was found in 1913 by Italian troops near the ruins of the Greek and Roman settlement of Cyrene, on the Libyan coast.
Mr Berlusconi's visit to Benghazi coincides with the anniversary of a coup that brought Colonel Kadhafi to power on 1 September, 1969.