After a two-day summit in Makkah they also agreed on a 10-year plan to increase trade between Muslims and to curb religious extremism, which they said has driven the Islamic world into crisis.
"Our plan is about moderation and modernisation," said Ekmeluddin Ihsanoglu, secretary general of the 57-member Organisation of the Islamic Conference (OIC).
"Moderation to fight the causes of extremism and modernisation to pull the Muslim world out of under-development," he said.
The leaders agreed in Makkah to set up a fund for disaster relief and development and called for intra-Muslim trade to be raised to 20 percent from 13 percent within 10 years. But they failed to say how they could achieve their goal.
"The Islamic Development Bank will start studies on the fund," Ihsanoglu told Reuters. "As to other programmes of the plan, they will require a longer time to be implemented."
FUNDING ISSUES A senior delegate at the talks said the leaders could not agree how to finance the fund, given huge disparity of wealth among the OIC members.
"We don't expect poor Muslim countries to offer a percentage of their budget of their GDP," he said. "But one symbolic dollar contribution, or one Muslim dinar, a year will be enough providing that the commitment is there," he said.
Malaysian Prime Minister Abdullah Ahmad Badawi said he hoped the fund would be large enough "to support nations that don't have anything".
He cast doubt on a summit declaration that one-dollar for every Muslim would be collected to preserve Islamic identity in Jerusalem, which the OIC said must be the capital of a future Palestinian State.
"It's a good idea ... but there are a lot of Muslims in the world who earn less than a dollar a day," he told Reuters.
Summit host King Abdullah of Saudi Arabia said on Wednesday extremists had hijacked Islam and left Muslims weak and divided.
In a challenge to militants who justify attacks on fellow Muslims by declaring them unbelievers, the leaders said on Thursday no Muslim could excommunicate another. They said a Fatwa, or religious edict, should only be issued by qualified scholars.
They also backed a proposal by Saudi Arabia to set up an international counter-terrorism body, and expressed concern at what they said was an increase in Islamophobia in the world.
Officials said during the two-day summit they wanted to breathe new life into the OIC, which has been ineffectual since it was set up 36 years ago with the aim of recovering East Jerusalem from Israel after the 1967 Middle East War.