Libya and families of the 1988 Lockerbie bombing victims have agreed to set up a £1.7 billion sterling compensation account.
Lawyers for the families said they and Libyan officials signed the agreement in London after an 11-hour meeting. Libya is expected to send a letter to the UN Security Council on Thursday or Friday taking responsibility for the bombing of Pan Am Flight 103 over Lockerbie, Scotland, in which 270 died.
The Libyan admission of guilt - long demanded by the United States and Britain - and the payment of the compensation are likely to be followed by moves to lift UN sanctions against Libya, possibly as early as next week.
But diplomats said the matter will not be settled until Libya admits responsibility in writing - something it has long been unwilling to do - and pays the compensation, which could reach $10 million per victim.
US sanctions will stay in place for now despite US oil companies' eagerness to do business with Tripoli again, US officials said. Some US sanctions predate Lockerbie and reflect Washington's long-standing anger at what it views as Libyan support for acts like the 1986 bombing of a Berlin disco that triggered US airstrikes on Libya.
Some relatives of the 259 people who were killed aboard the Boeing jumbo jet and the 11 people who died on the ground reacted bitterly at what they described as the first step toward Libya being welcomed back into the world community.
"Obviously we're not happy. We feel this may be the first step in the rehabilitation of [Libyan leader] Muammar Gadafy," said Mr Dan Cohen of New Jersey, whose 20-year-old daughter Theodora died in the bombing.
Many family members also feel ambivalent about compensation payments, saying nothing can replace their loved ones and demanding that Libya continue to be punished for the bombing through US sanctions.
An initial $4 million per victim may be paid once UN sanctions, which were imposed on Libya in 1992 and suspended in 1999 after Tripoli turned over two Libyan suspects for trial, are ended. One Libyan suspect was convicted and the other acquitted in 2001 after a trial in The Netherlands under Scottish law.
The first payment would be followed by another $4 million if the United States lifts its own sanctions and by $2 million if it drops Libya from the US list of state sponsors of terrorism.
If Washington does not take these steps within eight months of Libya placing the $2.7 billion into the escrow account, the victims' families would receive only $1 million more, bringing the total compensation to $5 million per victim. The remaining money would then revert to Libya.