The payment was finalized in a meeting between U.S. President George W. Bush and President Pervez Musharraf in New York Thursday evening.
Pakistan's ambassador to the United States, Ashraf Jehangir Qazi, told a news briefing in New York that participation in the Operation Enduring Freedom has cost Pakistan more than $700 million and said the rest of the amount would also be reimbursed soon.
"Budgetary allocation has already been made and $300 million will soon be paid," he added.
Pakistan provided five air bases to the United States in the beginning of the U.S. military offensive in neighboring Afghanistan. U.S. forces are still using at least two of these air bases.
Qazi said the two presidents also discussed an economic package for Pakistan but did not give details of this package.
Musharraf, he said, also discussed the problems of the Pakistani community in the United States with Bush, who assured him that the current operation against illegal immigrants was not directed against Pakistanis. Yet Pakistanis top the list of the immigrants deported from Washington since Sept. 11 last year.
Musharraf, the ambassador said, also raised the issue of student visas for Pakistani nationals wanting to study at U.S. universities. Bush assured Musharraf that Pakistani students were not treated as terrorism suspects but had to face certain problems because the United States was reviewing its entire system of security.
"Within the next few weeks, we will be able to resolve this issue. Pakistanis students will be able to study at American universities without losing the academic year.
Talking about his meeting with Bush, Musharraf said the U.S. president thanked him for catching 10 al Qaida terrorists from the southern Pakistani city of Karachi.
Musharraf reported that Pakistani military forces and police have arrested one Saudi, one Egyptian and eight Yemeni al Qaida operatives from Karachi.
Two al Qaida fighters were also killed in the encounter.
Musharraf said the men were so dangerous that "no judge would try them," out of fear for his or her safety.
Musharraf said terrorism in Pakistan was "a fallout of the war in Afghanistan" but Pakistan had not allowed it to spread. He said that sectarian groups operating in Pakistan were operating with the help of al Qaida terrorists while some foreign intelligence were also exploiting the situation.
U.S. Secretary of State Colin Powell, national security adviser Condoleeza Rice, the U.S. chief of staff and other senior American officials accompanied Bush in the talks.
The Pakistani team included Finance Minister Shaukat Aziz, Minister of State for Foreign Affairs Sharifuddin Pirzada, legal adviser to the government, Sharifuddin Pirzada, and the Pakistani ambassador to the United States.
Talking about his address to the U.N. General Assembly on Thursday, Musharraf said it reflected his expressed frustration over India's continued refusal to resume dialogue with Pakistan.
Reminding the international community of the steps Pakistan has so far taken to engage India in bilateral talks, the president told a news conference at the United Nations that India's stubbornness was responsible for the current tensions in the region.
"We have done so much. Our government has taken so many initiatives. We want peace and harmony but what do you do when India does not respond? It causes desperation," said Musharraf while explaining why he was unusually harsh in criticizing India in his address.
"It is a language of desperation," he added.
Asked if nuclear tests by India and Pakistan could also encourage Iran to conduct similar tests, Musharraf said Pakistan was committed not to encourage nuclear proliferation in its region because it was in the interest of the world peace.
Without naming Iran, he said any such development on its western border would be a cause of concern but Pakistan was not aware of the developments in its neighboring countries and therefore he was not in a position to comment on Iran's nuclear program.
When a journalist suggested that Musharraf was concentrating all power in his hands by enhancing the authority of the president, continuing as the army chief and creating the National Security Council, Musharraf said it was wrong to say so. Instead of assuming more power, he said, he would be delegating power to the prime minister and will also share it with the National Security Council.
"Instead of assuming more power, I am creating a system of check and balance. The prime minister will have the legislative and executive powers, not the president. I have also taken away the power of the president to dismiss a government and dissolve the national assembly. Now this power rests with the National Security Council. I have created new checks on his power."
Musharraf also warned that a U.S. military strike against Iraq could encourage India to take similar action in the disputed Kashmir region.
Pakistan, he said, did not want to get involved in any attack on Iraq but might change its stance if there was an international consensus.
"President Bush's statement that the U.N. Security Council would be deciding about a preemptive strike is very encouraging," said Musharraf, commenting on Bush's speech to the U.N. General Assembly earlier Thursday.
"But as a military (man), I think this doctrine of preemptive attack is not applicable everywhere," said Musharraf. "We will urge India not to try it because Pakistan is no Iraq and India is no United States."
It was former U.S. Secretary of State Henry Kissinger who first warned in a Washington Post op-ed last week that a preemptive U.S. strike on Iraq could encourage a similar action by India in Kashmir, a region disputed by India and Pakistan for the past 55 years.
India accuses Pakistan of sending infiltrators into the Indian part of Kashmir. Pakistan denies this but says that certain U.N. resolutions allow it to give political support to Kashmiri separatists.
A U.S. military action against Iraq, Musharraf said, would have "political, economic and military ramifications for Pakistan," which, like Iraq, is a predominantly Muslim country.
He said he was not disputing the case that Bush made against Iraq in Thursday's speech. "All that I am saying in our own national interests. We don't have any geographical affinity with Iraq. Our plate is already full, we don't want to cause it to overflow."
Defending Pakistan's decision to support the U.S.-led action in Afghanistan, Musharraf said the situation in Afghanistan was very different.
"We have borders with Afghanistan. Terrorism in Afghanistan directly affected us. But if there's an international consensus on Iraq, we would like to re-examine our position and observe reality."
He said a concentration of U.S. forces in northern Iraq would also concern Turkey "and as I said, all these have international ramifications."
Replying to a question about suspected terrorist mastermind Osama bin Laden, Musharraf said he believed the al Qaida leader was dead for two reasons.
First, he said, Pakistan had credible intelligence reports that bin Laden had been in Tora Bora. There are hundreds of caves in Tora Bora, all of which had been bombed but some of which hadn't been searched, Musharraf said.
Second, Musharraf said, bin Laden was a kidney patient who had imported two dialysis machines into Afghanistan before the U.S military strikes, one for himself. Musharraf said that bin Laden couldn't have survived without dialysis for so many months.
Musharraf said he was absolutely sure that bin Laden was not in hiding in Pakistan because Pakistani troops, police and tribesmen were searching the area and would have arrested him had they seen him.
"Bin Laden is a tall man who travels with a large entourage and he cannot hide for long even if he is alive," said Musharraf.
Earlier Thursday, Afghan President Hamid Karzai endorsed Musharraf's views when he said it was "more likely that bin Laden is dead."
Later, addressing the Pakistani community, Musharraf elaborated various steps taken by his government to strengthen the national economy and to bring peace and stability in the country.
He explained that former Prime Minister Benazir Bhutto was disqualified from elections because she was a convict and Nawaz Sharif had opted out of the elections through an arrangement involving him, Pakistan and Saudi Arabia.
He said he was not willing to allow "the looters and plunderers to return to power" because the government not wanted to bring "real democracy to Pakistan."