Jakarta – Indonesia and Australia will start negotiating a new economic partnership agreement aimed at liberalizing bilateral trade and boosting investment, the leaders of the two countries said on Tuesday.

Indonesia is attracting growing interest from foreign investors eyeing the vast domestic market and stable macroeconomic conditions enjoyed by the economy.

Australian Prime Minister Julia Gillard, who visited President Susilo Bambang Yudhoyono as part of a regional tour, said the new economic partnership would boost trade.

"Today, as our relationship strengthens, we have been able to agree to our two countries entering a comprehensive economic partnership," she said.

"One that not only comprehends further trade liberalization but deals with the full range of economic issued that bring our countries together, including investment, business to business links and capacity building." She did not give further details.

Yudhoyono said that total bilateral trade volume was $6.7 billion last year and in the first half of 2010 had reached $4.4 billion.

Gillard also discussed with Yudhoyono her proposal to build a regional refugee processing center in East Timor, in an effort to prevent asylum seekers from reaching Australian shores.

But the Indonesian president said the idea would need further discussion at a meeting scheduled between Canberra, Jakarta and Dili for early next year. "Indonesia is open to that but we have to discuss in depth to ensure this is a solution to our regional problem," he said.

Gillard also said Australia will invest $500 million in Indonesian schools and Islamic boarding schools over the next five years. She said Australia will donate a total of $2.1 million in aid toward disaster recovery in Indonesia, which has been struck by a series of volcanic eruptions and tsunami.