The move came after Sudan pressed fellow members of the Arab League to reject plans for the deployment of UN peacekeepers to Darfur, where war, disease and famine have cost up to 300,000 lives in three years.
Announcing the deal after a closed-door session at Arab League the summit, Yemeni President Ali Abdullah Saleh told reporters that the leaders had also agreed to strengthen the AU force by providing troops from Arab states.
War broke out in Darfur in February 2003 when rebel groups revolted against what they say is the political and economic marginalization of the region's black African ethnic groups by the Arab-dominated regime in Khartoum.
Palestinian foreign minister Nasser al-Qidwa confirmed that an agreement had been reached to "finance the AU troops for a period of six months" or until the end of its current mission which was renewed in March.
He said Arab leaders had called on Arab African countries to send more troops to join the AU force.
Arab League chief Amr Mussa confirmed an agreement on funding but declined to disclose the total amount that would be provided by Arab countries. However, a diplomat close to the talks said an aid package of some US$150 million had been agreed.
The move follows a vote in the UN Security Council on Friday to speed up plans to deploy peacekeepers to replace the AU mission.
Hamas funding
Leaders of the 22-member Arab League failed however to fill the gap emerging over a threatened Western freeze on aid to a Hamas-led Palestinian government, appearing set to keep their own aid at existing levels.
At an annual meeting marred by the absence of such key heavyweights as Egyptian President Hosni Mubarak and Saudi King Abdullah, they also called for reconciliation in war-torn Iraq.
The Palestinian Authority, soon to be led by the radical Islamic group
Hamas, looked set for bad news after Hamas supremo Khaled Meshaal urged Arab countries to open their coffers to help stave off a widening financial crisis. Mr Meshaal specifically asked for about US$170 million a month.
But a draft resolution on the Palestinian question, which is expected to be adopted, has suggested keeping the monthly allocation at the US$55 million decided at last year's summit in Algeria.
Meanwhile, leaders are expected to endorse a draft resolution stressing the need for an Arab role in the future of Iraq and supporting efforts at reconciliation sponsored by the Arab League.
The move reflected anxiety ahead of expected talks between the United States and neighbouring Shiite Iran over the continuing deadly violence in Iraq.
Also Lebanon's President Emile Lahoud and Prime Minister Fuad Siniora argued openly in a closed session over a draft resolution pledging to support Lebanese armed groups, a diplomat said.
Mr Siniora, who took part in the meeting without sitting in the Lebanese delegation headed by arch rival Mr Lahoud, demanded the removal of a clause in a chapter pledging support to the armed "Lebanese resistance".