LONDON (Reuters) - Botswana's former President Festus Mogae won the $5-million Mo Ibrahim Prize for African leadership on Monday for steering his country along a stable, prosperous path and leading the fight against AIDS.

Former United Nations Secretary-General Kofi Annan declared Mogae the winner of the world's largest individual award at an event at London's City Hall.

The prize is awarded to a democratically elected former leader of a sub-Saharan African country who served his constitutional term and left office in the past three years.

Mogae handed over power earlier this year in a smooth transition after nearly a decade in power.

"President Mogae's outstanding leadership has ensured Botswana's continued stability and prosperity in the face of an HIV/AIDS pandemic which threatened the future of his country and people," Annan said.

Botswana is a rare political and economic success story on the world's poorest and most unstable continent.

The country of nearly two million is the world's biggest diamond producer.

The six-member prize committee said Mogae had put in place one of Africa's most comprehensive programmes for tackling AIDS in a country where one in three adults is estimated to be infected with HIV.

Since stepping down, Mogae has teamed up with other former African presidents to fight AIDS.

Annan, a Ghanaian, chairs the prize committee which includes fellow Nobel peace laureates Martti Ahtisaari, a former president of Finland, and Mohamed ElBaradei, the director-general of the International Atomic Energy Agency.

The first winner of the prize last year was Mozambique's former President Joaquim Chissano, who stood aside after leading his country to peace and democracy after years of civil war.

Ibrahim, a Sudanese-born telecommunications entrepreneur, established the prize as a way to encourage good governance in a continent blighted by corruption and a frequently loose adherence to democratic principles.

Annan acknowledged that some would ask why a leader should be rewarded for doing the job he was elected to do, but he said "excellence has to be encouraged".

"I would want to see a discussion take place in our continent where every citizen in every country is asking: 'How come Festus Mogae won? What did he do to deserve the award? Why isn't my president winning?" he said.

ElBaradei, an Egyptian, said there was a link between poverty, lack of good governance, violence and the temptation to acquire weapons of mass destruction.

"We need to show people that you can in fact in Africa have good governance," he told Reuters.

Mogae will receive the prize at a November 15 ceremony in Alexandria, Egypt.

He will receive $5 million over 10 years and then $200,000 a year for life, with another possible $200,000 a year for 10 years for "good causes" that he supports.