updated 10/9/2008 2:42:30 PM ET 2008-10-09T18:42:30

Libya has started making payments into a $1.8 billion fund to compensate the families of American victims of Libyan-linked terror attacks in the 1980s, another step in the full normalization of long-strained ties between Washington and Tripoli, the State Department said Thursday.

The "substantial amount" deposited overnight into a U.S. government account is not the full amount needed to fulfill a compensation agreement reached earlier this year, but officials said it demonstrated Libya's willingness to resolve outstanding claims over the 1988 Pan Am 103 bombing over Lockerbie, Scotland, and the 1986 bombing of a German disco.

The agreement calls for the creation of a fund consisting of $1.3 billion for those attacks and the 1989 bombing of a French airliner, and $500 million to Libyan victims of U.S. airstrikes ordered in retaliation for the disco bombing.

Libya has sought donations from private businesses to help finance its share of the fund. The Bush administration has vowed that no American taxpayer money will be used for the U.S. portion but has not said where the money will originate.

David Welch, the top U.S. diplomat for the Middle East, who negotiated the deal, said the Libyan deposit "is a promising development" and a sign of Libya's "commitment to fully implementing the claims settlement agreement."

He would not discuss the amount of what he termed a "down payment" to the fund or whether it was made by the Libyan government or private entities. He said he hoped the remaining amount would be deposited soon despite the global economic crisis.

"Given the economic climate, it could be a bit of challenge," Welch told reporters in a conference call. But, he added: "We are hopeful that it will be done and hopeful that it will be done expeditiously."

Improving relations
Under the agreement, the Bush administration pledged to restore the Libyan government's immunity from terror-related lawsuits and dismiss pending cases, but officials stressed that it is not obligated to do so until the full compensation is paid. In addition, payments will not be made to victims or their families until the fund hits the $1.8 billion mark.

The payment was received just days after the opening of a U.S. trade office in Libya's capital and a historic visit there last month by Secretary of State Condoleezza Rice, the highest-ranking U.S. official to visit the North African country in more than 50 years.

The deposit had been expected in early September but was inexplicably delayed, angering some in Congress who have thus far refused to lift holds on the nomination of a new U.S. ambassador to Libya and funds for the construction of a new U.S. Embassy in Tripoli.

U.S.-Libyan relations hit a low point in the 1980s but began to improve after Libyan leader Moammar Gadhafi, whom President Ronald Reagan called the "mad dog of the Middle East," renounced weapons of mass destruction and terrorism in 2003.

The rapprochement stalled after Libya halted payments to the families of Lockerbie victims under a previous compensation deal that would have paid $8 million to each and in the absence of an agreement on the La Belle disco bombing in Berlin.

But it picked up again in August when Libya and the United States agreed to a new, comprehensive package that would cover compensation for all 1980s-era claims.

All 269 passengers and crew, including 180 Americans, on the Pan Am flight and 11 people on the ground were killed in the Lockerbie bombing. Three people, two American soldiers and a Turkish woman, were killed and 230 wounded in the Berlin disco attack. That attack prompted Reagan to order airstrikes on targets in Tripoli and Benghazi that Libyans say killed 41 people, including a girl identified as Gadhafi's adopted daughter.

The developments come amid a huge increase in interest from U.S. firms, particularly in the energy sector, to do business in Libya, where European companies have had much greater access in recent years. Libya's proven oil reserves are the ninth largest in the world, close to 39 billion barrels, and vast areas remain unexplored for new deposits.

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