NAIROBI, May 13 (Reuters) - Former rebels from southern Sudan said on Friday they were in talks with the U.S. government over exempting the region from sanctions imposed in 1997 on Africa's largest country.

The Sudan People's Liberation Army signed a peace deal with the Khartoum government in January to end more than two decades of war in southern Sudan.

SPLA deputy chairman Riek Machar told potential investors at a conference in Kenya they should not be put off by the U.S. embargo.

"We are discussing with the U.S. government what to do, either exempting southern Sudan or lifting the sanctions over the whole of Sudan and I believe we will succeed," he said.

The sanctions, which block bilateral trade and prevent U.S.-based firms investing in Sudan, were a hindrance to implementing the peace agreement, Machar said.

He encouraged northern Sudanese businessmen and Kenyan traders to get their goods into southern markets, which had been cut off for so long from the outside world by the war.

Machar also said the region was aware of the potential for inflation, particularly once the southern government is in place and officials' salaries work their way into the economy.

The new government is expected to be formed by July 9.

"Our fear is that once the government of southern Sudan is formed and money begins to flow in southern Sudan we will have inflation because so much money will be purchasing so few goods," he said.

The southern civil war broadly pitted the Islamist government in Khartoum against mainly Christian, animist rebels, complicated by issues of ethnicity, oil and ideology.

It claimed more than 2 million lives and forced at least 4 million people from their homes.

The SPLA proposes having a separate stock exchange and a commercial banking system in the south, as opposed to the Islamic banking in the north of the country.

Sudan's two main oilfields are in the south and under the peace deal the southern government will get about half of the country's oil revenues.

Luke Bidoang, a senior member of the SPLA's financial secretariat, calculated the regional government should get about $3.6 billion a year from crude if prices continued at $50 a barrel.

A TIGER? IN AFRICA?

Bidoang said Sudan's annual growth rate was forecast to be from 11 to 15 percent from 2005 to 2009, with a booming oil sector expected to contribute more than half of the growth.

Some businessmen at the conference were enthusiastic about winning short-term contracts to rebuild southern Sudan's infrastructure -- with the guarantee of donor money pledged in April of up to $4.5 billion for the whole country.

But some expressed caution at a lack of guarantees and an insurance sector for any long-term foreign direct investment.

"Is there the infrastructure and security there now to support businesses?" asked Hemand Desai of Osho Chemical Industries. "And what about in a year or two when the donor money has dried up and the investment has lost momentum?"

Bidoang said he was unable to say how the southern Sudanese government would attract longer-term cash when the risk of a return to conflict was so high and the local population so poor.