To the anger of many in Washington, Citgo Petroleum Corporation, a company controlled by the Venezuelan Government, will supply more than 45 million litres of oil at 40 per cent below market prices.

The deal is one of the most spectacular moves yet in Mr Chavez's attempt to market his "21st-century socialism" using his country's oil wealth.

While it will not change many minds in Washington about his populist and autocratic regime, Caracas hopes it will bolster Mr Chavez's claim as the coming leader of an anti-capitalist Latin America. Mr Chavez, who once dubbed President George Bush a "genocidal madman" and led a huge anti-US protest earlier this month, first proposed his fuel offer in August when oil prices were at a record high after Hurricane Katrina.

Joe Kennedy, the chairman of Citizens Energy, one of the organisations that will distribute the oil, said the deal highlighted the failure of oil companies in the US and the Government to step in to help.

"Our government has made billions of dollars just this year on the royalty payments the oil companies pay to the Government," he said. But when it is a question of poor Americans, "what do we hear from Washington? Sorry boys. There's no money in the till."

To promote his dream, Mr Chavez has offered cheap oil and refineries to his neighbours and pledged financial support for regional development programs.

All the while he has positioned himself as a rival to Washington, accusing the Bush Administration of plotting a coup against him, and predicting the imminent demise of American capitalism.

The US on Wednesday threatened to block a record-breaking arms deal under which Spain would sell ships and aircraft to Venezuela, claiming that the €1.3 billion ($2 billion) arms deal with Mr Chavez could destabilise the region.

The deal, due to be signed in Caracas on Monday, would be a huge boost to Spain's ailing shipyard industry and to the rest of its defence industry.

"Those air or naval platforms include US technology," the US ambassador to Madrid, Eduardo Aguirre, said on Wednesday. "We have not yet decided whether to grant our permission for obtaining that technology."