RIYADH, Aug 1 - Saudi Arabia's King Fahd, leader of the world's top oil exporter and a key US ally, died Monday after a long period of ill health that saw him hand over the reins of power in the last years of his turbulent rule.

His half-brother Crown Prince Abdullah, de facto ruler for a decade, was swiftly anointed his successor and powerful Defence Minister Sultan bin Abdul Aziz was chosen as crown prince of the ultra-conservative Gulf kingdom.

Medical sources said King Fahd, believed to be aged 84, died in hospital at dawn, 23 years after he took the throne to lead the country through oil crises, wars and the deadly menace of Islamic extremism.

"With all sorrow and sadness, the royal court in the name of his highness Crown Prince Abdullah bin Abdul Aziz and all family members -- in the name of the entire nation -- announces the death of the custodian of the two holy mosques, King Fahd bin Abdul Aziz from illness," an official statement said.

State television interrupted progammes to air verses from the holy Koran and many members of the ruling family crowded the Riyadh hospital where the monarch passed away to pay their last respects.

British Prime Minister Tony Blair said he regretted the death of a "good friend" while across the Arab world governments voiced their sadness and announced periods of mourning. An Arab summit due to be held in Egypt was cancelled.

"The kingdom has lost an honourable son and one of its dearest leaders... History will remember the great and numerous achievements he accomplished for the sake of the holy sites, his people and his nation," Egyptian President Hosni Mubarak said.

In Riyadh, Saudis, brought up in a rigorous doctrine of Islam, received the news calmly with shopping centres bustling and government offices remaining open.

Fahd, who became king in 1982 but was forced by ill health to hand over most powers to Abdullah in 1995, had been admitted to King Faisal Specialist Hospital in Riyadh in late May for "medical tests".

He was said to have suffered respiratory problems caused by pneumonia.

In a bid to reassure oil markets, where prices topped 61 dollars after Fahd's death was announced, a Saudi official said there would be no change in the kingdom's oil policy.

"Saudi Arabia will not change its oil policy and will work on providing the oil supplies needed by world markets and is keen on avoiding troubles," said the official.

Saudi Arabia, which sits atop a quarter of the world's oil reserves, currently produces about 9.5 million barrels per day with the capacity for an additional 1.5 million barrels.

After a brief crash over morning rumors of King Fahd's death, the Saudi stock market bounced back to close down slightly after confirmation of his passing. It closed at 13,084, down one percent from opening.

Announcing the succession, the official statement said: "Members of the family have pledged allegiance to Crown Prince Abdullah bin Abdel Aziz as king over the country.

"Then, King Abudullah bin Abdul Aziz... chose Defence Minister Sultan bin Abdul Aziz as crown prince... and members of the family pledged allegiance to his excellency."

However, the two are both elderly -- Abdullah was born in 1923 and Sultan in 1928 -- so Saudi Arabia faces the prospect of having to appoint a new king every few years.

Believed to have been born in 1921, Fahd took charge in 1982 of a vast kingdom which is the world's largest petroleum exporter and holds a quarter of global oil reserves.

He guided Saudi Arabia through the most turbulent era in its history, which saw the kingdom survive two Gulf Wars only to have to confront the menace of Islamic extremism.

Two years of strife perpetrated by Islamic extremists has claimed the lives of 90 civilians, 42 security personnel and 113 militants, according to official figures.

Saudi's alliance with the United States, the cornerstone of Fahd's foreign policy was sorely tested by the September 11, 2001 terror attacks on the United States, in which 15 out of the 19 attackers were Saudi.

Designated as next in line after King Faisal's assassination in 1975, Fahd was in practical terms running the country under the rule of his ailing brother King Khaled from 1975 to 1982, when he took over the throne.

After the stroke in 1995 confined him to a wheelchair, the king delegated most day-to-day business of government to Abdullah.

Fahd leaves behind an economy experiencing its biggest growth in two decades thanks to a spectacular surge in oil prices.

But while the economy of the world's oil powerhouse is set on a path of privatization and opening up to foreign investment, it faces long-term structural problems partly attributable to the nature of Saudi society.

The Saud dynasty dates back to the 18th century, when "Lord of the Desert" Mohammad bin Saud joined forces with an austere Islamic reformer, Mohammad bin Abdul Wahhab, and set about propagating by the sword a return to pure Islam.