The measure is part of a broad national security bill that will also beef up port security and better protect US chemical plants from terrorists.
Bush travelled to the picturesque backdrop of Arizona for the signing, where he saluted a state with one of the country's largest illegal immigration problems.
An estimated 1.2 million people were arrested last year alone for illegal entry, most of them through the unsettled desert-like region along the Arizona-New Mexico border. Every year, another half a million manage to elude detection.
Under the bill, the number of border patrol agents will increase by 50 per cent to 18,000 by 2008, and sophisticated equipment will be added to help spot unlawful crossers, including ground base radar, infrared cameras and advance sensors.
An additional 6,700 new beds will be added to detention centres. Currently, many illegal immigrants are arrested but sent away with a court date because there is no place to hold them.
'That's what the people of this country want,' Bush said. 'They want to know that we're modernizing the border so we can better secure the border.'
US congress for years has failed to grapple with the immigration problem, and Bush had hoped for a broader approach that would make it easier to obtain work visas and become US citizens. But the concept died in the House of Representatives, although the Senate favoured the idea.
'We must ... recognize that enforcement alone is not going to work,' Bush warned. 'You need comprehensive reform that provides a legal way for people to work here on a temporary basis.'
Coming less than five weeks before the November 7 congressional elections, the measure gives Bush's beleaguered Republican Party a badly needed issue to please its conservative base and motivate supporters.
The centre-right Republicans are at risk of losing their majorities in both chambers of Congress to the centre-left Democrats, partly out of disaffection with the war in Iraq.
The Mexican government has opposed the proposed fence.
The barrier will affect all four US states bordering Mexico. Even if the legislation's double fencing is constructed as written before 2009 along nearly the entire Arizona border, most of the New Mexico border and parts of the frontier California and Texas, nearly 2,000 kilometres of the US-Mexican border would remain unsecured.
The bill only authorizes 1.2 billion dollars for what is expected to be a 6-billion-dollar project.
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