The remote Pacific nation of Palau has agreed to accept 17 Chinese Muslim prisoners held at Guantánamo Bay, giving the Obama administration a major fillip as it faces the complex problem of closing the controversial prison.

Johnson Toribiong, the president of Palau, said the decision was a “humanitarian gesture” intended to help the detainees restart their lives.

“This is but a small thing we can do to thank our best friend and ally for all it has done for Palau,” he said.

Negotiations between Washington and the Palauans over the prisoners coincided with discussions about a $200 million (£120 million) renewal of a regular assistance package on which the island, a former US territory, depends.

However, a senior US state department official described the idea of any connection as “completely false”.

The Obama administration was beginning to despair of finding a home for the ethnic Uighur detainees, whom the Pentagon has determined are not “enemy combatants” and should be freed. They have been left in legal limbo after an appeals court blocked their release into the United States.

After six or seven years of incarceration, the Uighurs’ new home is located 500 miles south-east of the Philippines, and has 20,000 people scattered over eight main islands.

There are no buses and just 38 miles of roads, almost half of which are unpaved. Employment opportunities are limited to the government and the luxury tourist industry. The islands receive 50,000 visitors a year, many of them scuba divers, and were twice chosen as the location for the US reality television show “Survivor”.

The 17 detainees had become a symbol of the difficulties Mr Obama has faced in achieving his goal of closing the jail at the US naval base in Cuba within a year of taking office. With 250 detainees remaining, finding new homes or adjusting trial systems has proved problematic.

Washington has decided the Uighurs cannot be returned to China over fears that they face persecution there, but American states that were initially amenable to accepting the group got cold feet and Australia, a major ally with a Uighur community, declined to take the group.

It was alleged that the Uighurs had trained at terror camps in Afghanistan and belonged to an Islamist separatist movement in the western Xinjiang region.

In 2006, Albania accepted five Uighur detainees from Guantanamo but has since balked at taking others, partly for fear of diplomatic repercussions from China. Palau is one of a handful of countries that does not recognize China and maintains diplomatic relations with Taiwan.