The drought affecting large swathes of northern China is the worst in six decades in many areas and has left key grain-growing regions with no real rainfall in more than three months.

At a meeting on Wednesday chaired by Premier Wen Jiabao, the government decided to allocate funds to pay rice-growers higher prices for their grain in a bid to spur production, said a statement by the State Council, or Cabinet.

The statement did not say how much of the 6.7 billion yuan in anti-drought spending would be earmarked specifically for that purpose.

Other spending would go toward diverting water to affected areas, constructing emergency wells and irrigation facilities, and other measures to combat the dry spell.

The State Council warned the situation could worsen, saying rainfall across northern China for the foreseeable future would remain "persistently below normal levels and major rivers will continue to be generally dry."

China has a state policy of grain self-sufficiency and any move to purchase wheat overseas -- which some see as increasingly likely -- could impact world commodity markets.

Wheat is generally grown in the north, while rice is primarily cultivated in the wetter south.

Concerns about the impact of the drought sent wheat prices on the Zhengzhou commodity exchange in central China up nearly across the board on Wednesday, the exchange said.

The State Council said "grain costs will continue to rise".

The dilemma could not have come at a worse time for the government, which is struggling to cap soaring prices of food and other key goods.

On Tuesday, the central bank announced the third interest rate hike in four months, one of a series of macro-economic levers it has pulled to tame inflation -- which has a history of sparking unrest in China.

The drought has become the top issue of public concern in China and cast a pall over the country's Lunar New Year holiday celebrations, which are continuing this week.

Both President Hu Jintao and Wen paid separate visits to stricken areas during the height of the holiday last week and called for "all-out efforts" to fight the drought.

Besides the impact on farmland, nearly three million people are suffering from drinking water shortages.

The UN's Food and Agriculture Organisation (FAO) issued a warning Tuesday over the impact on the winter wheat crop, a key harvest for the world's biggest producer of the grain.

"The ongoing drought is potentially a very serious problem," the Rome-based agency said.

The eight affected grain-farming provinces produce more than 80 percent of China's winter wheat.

More than five million hectares (12.4 million acres) of crops have been damaged -- an area half the size of South Korea, China's drought control agency has said.

State television reports on Wednesday seized hopefully on snowfalls in eastern China's Shandong province and neighbouring Henan. Snow also was forecast for Thursday in and around Beijing.

The drought is the worst in 60 years in Shandong, the nation's second-biggest wheat producer, where rainfall in recent months has been 85 percent below normal.

Hebei province in northern China was already channeling large amounts of water from the Yellow River, and was poised to divert more to affected areas, the China Daily reported.

World food prices reached their highest-ever level in January and are set to keep rising for months, the FAO said last week, warning that the hardest-hit countries could face turmoil.

Rising food prices have been cited among the driving forces behind recent popular revolts in north Africa, including the ongoing uprising in Egypt and one in Tunisia that led to the ouster of president Zine El Abidine Ben Ali.

"Wheat appears to be the main agricultural commodity driving global prices higher," Moody's Analytics said Wednesday in a research note.

It echoed the FAO in saying adverse weather in key wheat-growing areas around the globe would impact supplies and prices.

"China has traditionally been self-sufficient in its wheat consumption but may have to import a significant amount this year" as a result of the drought, Moody's said.

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