RABAT (Reuters) - The European Union will grant Morocco 654 million euros over four years and begin moves to link Morocco's energy sector with those of its northern neighbours, the EU said on Monday.

After meeting in Brussels on Monday, officials will sign a common declaration to prepare an eventual integration of Morocco's power sector into the EU's energy market, it said, without giving any deadline.

The money will be used to support social and economic development, human rights and governance, the environment and support for institutions under the EU's neighbourhood policy over the 2007-2010 period, it said. This policy aims to deepen links between an enlarged EU and nearby countries.

"We note that Morocco is pursuing with determination the execution of its reforms and that, in this context, it is rapidly progressing in realising the goals of the EU-Morocco action plan," the European Commission said in a statement.

The EU wants to reward Morocco for lowering barriers to trade and enacting reforms to promote democracy and transparency and boost investment and trade to quicken economic growth.

Morocco's economy has lagged far behind those of its northern neighbours, leading to high unemployment and poverty and swelling the ranks of illegal migrants trying to reach the EU in search of work.

Morocco's government has said it needs to spend between $1.5 billion and $2 billion on its power sector to meet surging demand and is drawing heavily on private investment.

It has doubled the capacity of its interconnector to Spain to 1400 MW and obtained a Spanish power market trading licence.

But officials have played down the likelihood of a free power market in Morocco in the near future because the company imports nearly all of its energy needs and costs are still too high to remove state support mechanisms.