A plastic bag that dissolves in water or breaks down into compost has been awarded one of the top Australian science prizes.

Plantic Technologies' cornstarch-derived 'plastic' bag was awarded the Australian Museum Eureka Prize for Industry.

The bag is safe for use in food packaging and can be moulded like common petrochemical plastics but is completely biodegradable. When it is buried in a compost heap, worms and bacteria will convert it to compost within a month. It is also water soluble.

Plantic plastic is already used by UK confectioner Cadbury Schweppes for its packaging trays, and other European confectioners are testing the product.