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Libyan leader Muammar Gaddafi has said oil profits should be given directly to citizens, as part of sweeping economic and political reforms.

Speaking during celebrations to mark 39 years in power in Libya's second city, Benghazi, Col Gaddafi extolled the virtues of privatisation.

The Libyan leader said society would "reformulate itself in a new, free, and democratic way".

The changes will take place in the next four months, he said.

"The money that we put in the education budget, I say let the Libyans take it," Col Gaddafi said in a 100-minute televised speech to the General People's Congress, Libya's equivalent of a parliament.

"Put it in your pockets and teach your kids as you wish, you take responsibility."

"As long as money is administered by a government body, there would be theft and corruption".

He admitted there would be "chaos" while the reforms were implemented but urged people "to be ready" to receive their money.

Purge

The BBC's Rana Jawad in the capital, Tripoli, says a leader who once favoured socialism seems to be fully embracing capitalism.

Reuters news agency says many Libyans feel they have not benefitted from the recent rise in the oil price and the return of foreign investment since the end of Libya's international isolation.

Libya's is Africa's third largest oil producer after Angola and Nigeria.

Reuters says that the only government departments to be spared a purge are those of justice, defence, interior and foreign affairs.

Much of what Col Gaddafi said endorsed the recent calls made by his son, Sayf al-Islam Gaddafi, our correspondent says.

Sayf al-Islam Gaddafi has been a leading proponent of reform, but announced his retirement from politics last month.

Over the weekend, Libya signed a $5bn deal with Italy to resolve colonial-era disputes.

Italy agreed to fund huge infrastructure projects, including a motorway all the way along the Mediterranean coast.

US Secretary of State Condoleezza Rice is to visit Libya last this week - the most senior US official to visit since diplomatic ties were restored in 2004, after Col Gaddafi announced he was abandoning plans to acquire weapons of mass destruction.