The fund, which will comprise financial contributions by members of South Asian Association for Regional Cooperation (SAARC), will offer loans and grants to member countries for projects to help reduce poverty.

The agreement on trade, to be signed during the summit of heads of government on Wednesday and Thursday, will cover services in areas such as health, hospitality, communications, computers and air transport, said Nirupama Rao, India's Foreign Secretary.

Bhutan chose to have the focus of the summit be climate change because South Asia is highly vulnerable to its effects, said Bhutanese Foreign Secretary Daw Penjo. Bhutan has suffered from the global warming linked flooding of lakes caused by melting glaciers, Penjo said.

"Several lakes have burst, causing devastating effects downstream," he said.

One-fifth of the world's population and many of its most impoverished live in the eight SAARC countries, comprising India, Pakistan, Sri Lanka, Bhutan, Nepal, Afghanistan, the Maldives and Bangladesh.

SAARC was set up to promote economic cooperation and has since sought to tackle issues such as food security and terrorism. But progress in most areas has been slow, mainly because of the rivalry between India and Pakistan. The Prime Ministers of both countries will likely hold talks later this week in Thimpu, the Bhutanese capital, indicating signs of a possible thaw.

Peace talks between India and Pakistan were stalled after a deadly terror attack on Mumbai, India's financial hub, in 2008 in which 166 people were killed. New Delhi blamed the attacks on Pakistan-based militants.

Since then, India and Pakistan have been under pressure to resume dialogue despite New Delhi's continued insistence that Pakistan has not done enough to reign in Muslim extremists operating in its territory.

Bhutan, which ended more than a century of monarchy in 2008 with its first parliamentary elections, is hosting the SAARC summit for the first time since the group was set up 25 years ago.

Lack of resources and infrastructure prevented the tiny nation from hosting SAARC leaders until now, said Penjo. Bhutan has long been a holdout from modernity, a mountainous land where Buddhist kings reigned supreme, allowing in the Internet and television in 1999 and coming up with the idea of Gross National Happiness, an all-encompassing political philosophy that seeks to balance material progress with spiritual well-being.

The South Asian countries have vowed to step up efforts to fight terrorism, including its financing and associated drug trafficking and illicit arms trade, Penjo said. He did not detail how the $300 million fund for infrastructure and other projects will be spent, but much of the region's infrastructure, including its transportation and communications, are in desperate need of improvements.

Member nations will start a South Asian University with centres in New Delhi from October, 2010 and strengthen a regional Food Bank to help member-countries hit by natural calamities, Penjo said.