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German Chancellor Angela Merkel attends a presentation of a newly designed 2-Euro coin at the Chancellery in Berlin, Germany February 10, 2017. REUTERS/Hannibal Hanschke

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BERLIN (Reuters) - Germany signed an agreement with Iraq on Monday to provide a 500 million euro (£424.2 million) credit facility to fund investments aimed at rebuilding Iraqi infrastructure damaged in the war with Islamic State militants.

The credit line, the biggest yet provided to Iraq, was promised by Chancellor Angela Merkel to Iraqi Prime Minister Haider al-Abadi a year ago.

"We want to help the Iraqi government rebuild public infrastructure so that the people who had to flee IS terrorism can return to their homes," Foreign Minister Sigmar Gabriel said in a statement.

Gabriel said the liberation of eastern Mosul from Islamic State by Iraqi security forces marked an important success, and tens of thousands of Iraqis had already returned to their homes, as they had in other areas such as Ramadi, Falluja and Tikrit.

"Islamic State cannot be defeated militarily alone," Gabriel said. "More engagement and investment to ensure functioning water and energy supplies and transportation systems are needed to transform these cities and areas into peaceful, vibrant and liveable homelands."

Merkel's coalition government is under pressure at home to do more to tackle Europe's migrant crisis, which has seen over 1 million people arrive in Germany over the last two years, including tens of thousands of Iraqis.

The funding comes from the KfW Banking Group, with a small team of German officials to advise Iraq on how to distribute it.

(Reporting by Andrea Shalal; editing by Erik Kirschbaum and Mark Trevelyan)

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