"The new agency will be set up in December and its function will be to distribute food and stabilise prices," a food ministry official told Reuters.

He said the funding of the agency, whose name and head have yet to be decided, would come from the state budget.

"It is most probable the agency will only deal with rice, in line with an agreement with the International Monetary Fund. The president will appoint the head and choose a name for the agency," the official said.

He gave no further details.

Bulog has long been criticised for collusive practices relating to distribution of staple food and accused of awarding contracts to favoured big companies.

The commodity regulator has lost its monopoly to import all basic commodities, except for its monopoly on rice, in line with IMF agreements.

But for the first time in three decades, it allowedprivate traders to import rice in September.

In August, the government sacked Bulog chairman Beddu Amang in the interests of greater efficiency. He was replaced by trade and industry minister Rahardi Ramelan.

Traders said Amang was sacked because of closeness with the Salim Group, headed by Liem Sioe Liong, a close ally of former president Suharto.

The group had extensive and lucrative business dealings with Bulog including distribution of cooking oil, shipping and buying of imported rice and processing of wheat flour.

Bulog organised rice tenders in September in an effort to be more transparent, and bought 716,000 tonnes of rice in tenders for September, October and December shipments.

But trade sources said on Tuesday that after the initial purchase by tender, the agency had also bought rice outside tenders. They said Bulog had bought 700,000 tonnes of rice through direct negotiations with traders and was looking for another 200,000 tonnes through direct sales as well.

The rice was bought at$286 per tonne, on a cost-and-freight (C&F) basis for shipments from October to March, the sources said. The origin was Thailand and Vietnam.