President Barack Obama's Democratic allies cheered the news as a solid step towards helping afflicted areas recover from the worst environmental catastrophe in US history but said that more action would be needed.

Democratic House Speaker Nancy Pelosi welcomed the news but warned: "If it takes more than 20 billion dollars, BP will have to cover the full amount for the families, workers, and small business owners of the Gulf Coast."

"We will monitor BP's payments to those hit hardest by this crisis, and will not hesitate to pass tough legislation if BP fails to follow through on its responsibilities," she said in a statement.

"It is a good first step toward compensating victims," said Democratic Senate Majority Leader Harry Reid, adding that BP was signalling "it is willing to take some responsibility for its actions."

"I am hopeful that this development will help jump start the rebuilding process for the industries, businesses and residents in the Gulf Coast who were hurt by this disaster," Reid said in a statement.

Democratic Senator Robert Menendez called the fund "the very least BP must do to start making the coastal communities devastated by its recklessness whole again."

"But it should not be mistaken for an acceptance of full accountability or as a removal of the liability cap" on economic damages, set by law at 75 million dollars, said Menendez, who favors scrapping the limit.

"We absolutely need to continue our work to guarantee that BP is bound to cover all economic and environmental damage," he said in a statement.

Obama's number two Republican critic in the House of Representatives, Eric Cantor, welcomed the announcement but sharply criticized the president's overall approach to the catastrophe.

"I do commend the president working with BP to establish that fund, and clearly BP has to pay. For their part, they've clearly stepped up, taken responsibility and support the escrow fund. But the president still has not offered a fix to the problem," he said through a spokesman.

Cantor charged that Obama had "not offered any plan to help the people right now who need it most."

Republican Senate Minority Leader Mitch McConnell had no immediate reaction to news of the fund, but had warned that the energy giant was fully responsible for costs tied to the "monumental" disaster in the Gulf.

"BP should pay for every bit of it. They've said they're going to and they certainly will pay for every part of the cost of this disaster," McConnell had said as the Senate began its work on Wednesday.

"But in the meantime, the question is, are we going to get the leak stopped and what are we going to do to keep that oil offshore if at all possible?" he said.

Republican Senator George Lemieux, whose home state is Florida, said "questions remain" about the mechanics of the fund but called its creation "a positive sign for those who are losing money because of this disaster."

"I commend the president for pursuing this idea and pressing BP to make it a reality. Job number one remains stopping the spill; the second is mitigating the spill's effects," he said in a statement.

Democratic Senator Mary Landrieu, who has warned against responding too harshly against the oil industry that accounts for many jobs in her home state of Louisiana, cautiously welcomed the news.

"Before I applaud too loudly, I'd like to get a better and more rigorous estimate of what the damages are actually expected to be. Twenty billion dollars may be the tip of the iceberg," she said.

Landrieu, who called for "an accelerated claims process," also vowed to "continue to be holding BP's feet to the fire" and work to make sure "that not one single Louisiana business goes bankrupt as a result of BP's negligence."

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