Shawn Donnan, Jakarta – British Prime Minister Tony Blair signalled on Thursday that London would normalise its defence ties with Indonesia, saying in Jakarta that the two countries were entering a "new relationship".

Mr Blair's comments came after a meeting with Indonesia's president, Susilo Bambang Yudhoyono, during which he praised the former general's leadership and Indonesia's role as a moderate voice in the Islamic world.

Mr Blair said the UK wanted to strengthen its defence and anti-terrorism ties with Indonesia and in doing so, would change its defence policy towards Indonesia. The UK has previously limited sales of arms and other military equipment as a result of past human rights violations by the Indonesian military.

Mr Blair didn't elaborate on how the policy would be changed, but said: "We want in defence terms now to treat Indonesia as it should be, as a friend and as an ally."

British officials had said earlier that closer defence ties could allow moves such as joint military exercises but might not immediately lead to arms sales.

Mr Blair said the UK and Indonesia would set up a joint Islamic council with participation from religious leaders in both countries. He also met with a number of Islamic leaders and visited an Islamic boarding school on Thursday.

During his meeting with Indonesia's Islamic leaders, he faced criticism over British policy on Iraq and Palestinians' new Hamas-led government.

Azyumardi Azra, a leading Islamic scholar and rector of Indonesia's State Islamic University, appealed for Mr Blair to engage Hamas.

"If Britain is committed to democracy, then they have to deal with Hamas who has been elected by the Palestinian people. You cannot ignore them," said Mr Azra. He also urged Mr Blair to pull British troops from Iraq so they can be replaced by UN peacekeeping forces.

Blair's visit – the last leg in his one-week tour that has also taken him to Australia and New Zealand – comes just over two weeks after Condoleezza Rice, US secretary of state, visited Jakarta where she praised Indonesia's efforts in fighting terrorism and improving democracy. The US resumed military ties with Indonesia last year.