China and the remote Himalayan nation of Bhutan have agreed to establish diplomatic relations and resolve a long-standing border dispute, China's foreign ministry said.

Chinese Prime Minister Wen Jiabao held talks with his Bhutanese counterpart Jigmi Y. Thinley on the sidelines of the UN Conference on Sustainable Development in Rio De Janeiro on Thursday, the ministry said in a statement.

"China is willing... to establish formal relations with Bhutan, resolve the border issue between the two nations at an early date, strengthen exchanges in all areas and advance Sino-Bhutanese relations to a new stage," Wen said.

China appreciated Bhutan's support for the "one China policy" which maintains that Taiwan and Tibet fall under China's sovereignty, Wen said.

Thinley said his talks with Wen carried historic significance as it marked the first meeting between the heads of the two governments, the statement, posted on the ministry website, said.

"Bhutan resolutely pursues the one China policy and has the strong desire to strengthen understanding and friendship with China," it quoted Thinley as saying.

"(Bhutan) is willing to establish formal diplomatic relations with China at an early date."

Bhutan, a strong ally of India, has refrained from establishing relations with China and watched with concern as Beijing took over control of Tibet in the 1950s.

Despite a lack of formal ties, China and Bhutan have engaged in several rounds of talks to resolve the ongoing dispute along the about 470 kilometres (290 miles) of shared border.

In 1998, the two sides signed an agreement to maintain peace in the border area.