Although negotiations lasted into the night, sources said Japan and the United States reached a basic agreement earlier Tuesday on a trade dispute over interconnection fees charged by NTT Corp.

The two sides have agreed to effectively cut fees by about 22.5 percent in two years followed by substantial reductions thereafter in the charges that NTT imposes on competitors to access its local circuits, sources said.

Chief negotiators from the two parties were to meet Tuesday to finalize an accord, after working out its specific wording, the sources said.

The Japanese side is led by Deputy Foreign Minister Yoshiji Nogami. His U.S. counterpart is Deputy U.S. Trade Representative Richard Fisher.

The NTT fee issue was the biggest stumbling block in Japan-U.S. deregulation talks.

Japan, in an earlier compromise, proposed a 22.5 percent cut over three years. Its initial proposal was for the same cut, but over four years.

In the belief that high interconnection charges are barring foreign access to Japan's telecommunications services market, Washington demanded a 22.5 percent reduction in the first two years and up to 41.1 percent at the earliest possible opportunity.

The basic agreement is essentially in line with the demands of U.S. negotiators, who do not appear to have altered their position since the latest round of talks started on July 10, the sources said.

The Liberal Democratic Party's telecom industry lobby as well as NTT, which does not want to see its revenues cut, insisted on a 22.5 percent reduction over three years, the sources said.

Faced with this pressure, officials of the Posts and Telecommunications Ministry devised a proposal to have the rate reduced by 25 percent over three years, with a 22.5 percent cut in the first two years, assuming NTT's call traffic shows stronger growth in the years ahead.

For the period after the third year, or fiscal 2002, Japanese negotiators offered to work out measures, including a revision of the law governing NTT, with the aim of effecting a substantial cut adding up to an eventual 41 percent, the sources said.

Negotiators started bilateral talks in Tokyo on the issue July 10, hoping to resolve the dispute before Prime Minister Yoshiro Mori and President Bill Clinton meet later this week ahead of the Group of Eight summit that begins Friday in Okinawa.

In the meantime, a U.S. Embassy spokesman said reports that the U.S. was close to caving in to Japan's position were wrong, after Monday's self-imposed deadline passed with no accord.

"Reports that the NTT talks have concluded are premature," he told reporters. "While progress has been encouraging, reports that they had reached an agreement came as a complete surprise to the U.S. negotiator. The talks continue," he said.

"Deputy U.S. Trade Representative Richard Fisher has agreed to stay on one additional day to see if the talks can be brought to a successful conclusion."