SYDNEY - Australia said Friday it had offered compensation to Save the Children staff after "regretting" relying on allegations the charity had encouraged asylum-seekers held on the Pacific island of Nauru to harm themselves.

Save the Children welcomed the confidential financial settlement, but said it still had concerns about those living on Nauru, where two refugees set themselves on fire this week. One of them died, while the second was in a critical condition in hospital in Australia.

"We've always believed Nauru is a ticking time bomb and you can't leave people stranded on a tiny tropical island for three years, remove all hope and expect that they will be OK," the charity's policy director Mat Tinkler told AFP.

Australia sends asylum-seekers arriving by boat to Nauru or Papua New Guinea's Manus Island. They are denied resettlement in Australia even if they are genuine refugees and are returned to their home countries if they wish.

The compensation relates to an incident in October 2014 when 10 Save the Children workers were stopped from working at the detention centre on Nauru. Nine were subsequently deported.

At the time, the immigration department cited allegations that Save the Children's staff had "orchestrated protest activity, coached and encouraged self-harm of detainees" to cast doubt on Australia's tough immigration policy.

Two independent reviews into the allegations were critical of the government's decision to have the charity's staff removed from Nauru.

The department on Friday acknowledged that monetary compensation would not make up for the damage the allegations had made to the British-founded charity's reputation.

The department said it "regrets the way in which... the allegations relied on by the department... may have led other NGOs and members of the public to question the integrity of SCA (Save the Children Australia) as a provider of government services or, to the extent that it may be relevant, as a child rights organisation".

Australia's policy of offshore immigration processing has been criticised by the UN, and in October Nauru's Regional Processing Centre was converted into an "open centre", giving its inhabitants freedom of movement.

Meanwhile Papua New Guinea's Supreme Court ruled last week that detaining asylum-seekers on Manus was "contrary to their constitutional right of personal liberty". The country's prime minister has since ordered it to close.