Presidents Nestor Kirchner, of Argentina, Luiz Inácio Lula da Silva, of Brazil, Nicanor Duarte, of Paraguay, Rafael Correa, of Ecuador, Evo Morales, of Bolivia and Hugo Chavez, of Venezuela, signed the bank into being.
Uruguay is also a signatory of the initiative but given the border controversy with President Kirchner over the construction of a pulp mill on a shared river, President Tabare Vazquez was not present. Chile, Peru and Colombia have not adhered to the Bank.
South American dignitaries and government officials cheered after the leaders signed the accord on a glass-topped table, backed by flags of their South American nations in the Argentine presidency seat, Casa Rosada.
It was Kirchner's last official act as president before his wife, Cristina Kirchner takes over on Monday.
Chavez and Kirchner pushed the initiative to create the regional bank in 2006, hoping it will help wean the region off what are widely seen as the negative influences of the IMF and World Bank, responsible for failed policies in the region.
President Chavez said it was extremely important the region had its own financing sources to break its dependency on multilateral lending institutions such as the IMF.
Chavez said the banking systems of the region had over US$ 200 billion deposited in the "north," banks, resources which could be used to finance development and infrastructure in each country.
"This is the start of a historical moment," said Bolivian President Evo Morales, whose country is the continent's poorest.
He praised the bank as a new tool to fight poverty and ease inequalities and criticized what he characterized as heavy-handed lending practices of international lenders who demand austerity prescriptions as conditions for extending credit.
"Only a strong and united South America can occupy its rightful place among nations," Brazilian President Luiz Inácio Lula da Silva said. "This will be the first international bank truly controlled by the nations of our continent."
US educated Ecuador's Correa said that the Bank of the South will help Latin America break out of its financial chains and insisted that political decisions are far more important and significant socially than the efficiency theories of the neo-liberal economic schools.
The bank will start operations in 2008 with an initial capital of seven billion dollars. Based in Caracas, the Bank of the South will have regional offices in Buenos Aires and La Paz. The economy ministers of the member countries have 60 days to draw up an agreement on how the bank should be run, an Argentine official said.
However the agreement will establish several procedures, including its contribution system and whether the entity will take into account the differences in economic weight of the nations, which remains a controversial issue.
The bank will be run by a Board of Directors made up of the economy ministers of member states.
Augusto de la Torre, World Bank chief economist for Latin America, welcomed the bank.
"It's a very interesting initiative which I think expresses the desire to find stronger cooperation between Latin American governments," he underlined. "As far as the World Bank is concerned, this new initiative is not perceived as a competitor."
IMF-watcher Paul Blustein at Washington's Brookings Institution said the project highlights Latin America's yearning for greater autonomy after decades of sporadic financial crises and imposed austerity measures, such as IMF missteps ahead of Argentina's 2002 economic meltdown.
"It's really emblematic of how Latin America has become disillusioned with the model that the IMF and the World Bank and the U.S. Treasury promotes the so-called Washington consensus," he said.
Mercopress