The Philippines and its largest Muslim rebel group signed a peace deal on Monday that serves as a roadmap to forming a new autonomous region in the south, but both sides agree much more needs to be done to end over 40 years of conflict.

A successful agreement would be a boost for President Benigno Aquino at home and among foreign investors, managing what two presidents before him failed to achieve - peace with the Moro Islamic Liberation Front (MILF).

Manila and MILF want to set up the region, to be known as "Bangsamoro", in the south of the mainly Roman Catholic country before Aquino steps down in 2016, giving the Muslim-dominated area greater political powers and more control over resources.

They will return to the negotiating table next month in neighbouring Malaysia to discuss details on wealth and power sharing, as well as the pace of decommissioning the rebels' 11,000-strong army.

Aquino and MILF leader Ebrahim Murad held one-on-one talks before the signing of the framework agreement. Murad handed Aquino a miniature gong, which he ritually sounded.

"This is the sound of peace," he told Aquino.

It was Murad and Aquino's second meeting since early August 2011 when they held secret talks in Tokyo, a turning point in interrupted peace negotiations that have lasted nearly 15 years.

"Much work remains to be done in order to fully reap the fruits of this framework agreement. We have commitments to fulfil, people to lead, and dreams to achieve," Aquino said at the signing ceremony.

Not everyone was so optimistic. Nur Misuari, founder and leader of another Muslim rebel group, the Moro National Liberation Front, which signed a peace deal with the government in 1996, said the MILF was "signing its death sentence".

Misuari said thousands of MILF members were abandoning the group because they don't want to surrender their arms, a claim that the government and rebel peace panel members disputed.

A small breakaway MILF force, criminal gangs, feuding clans, and al Qaeda-linked radical Islamic militants are also actively operating in the area, a reminder to potential investors of the volatile security in the south.

"CIVILISED AND PRACTICAL"

Aquino is expected to form a 15-member transition commission that will propose new legislation to create a new Muslim local government for Bangsamoro, the name given by the Moro tribes for their homeland.

A plebiscite by 2015 in Muslim-dominated areas in the south will determine the shape and size of the new Bangsamoro region.

The autonomous government will have greater political powers and more control over resources, including minerals, oil and natural gas than the existing Muslim-governed entity. Currency, postal services, defence and foreign policy will remain under the central government.

The agreement did not give details of the power-sharing arrangement. But it guarantees rights of both Muslims and non-Muslims, unlike a 2008 deal that was struck down by the Supreme Court as unconstitutional.

"Negotiated political settlement is the most civilised and practical way to solve the Moro problem," Murad said in his speech. "We in the MILF central committee did not waver and vacillate in pursuing it to the end, despite the devastating three all-out wars in 2003 and 2008 waged by previous Philippine regimes."

Baibonn Sangid, 47, former chairperson of the Young Moro Professional Network, cried during the ceremony, remembering how her mother was killed during the war in the early 1970s.

"I can't contain my happiness," she said, adding she and her family used to flee to evacuation centres as a child during military encounters.

Hundreds of Muslims, many in a 20-vehicle caravan from Mindanao, gathered on a busy street about 200 metres (yards) from the presidential palace to lend support to the peace agreement, shouting "Allahu akbar" (God is Greatest).

They also waved banners and held placards which read "Give peace a chance" and "We support lasting peace in Mindanao".

"There's no room for pessimism," Norhaiya Macusang of political group Anak Mindanao, told the crowd.