Libya is prepared to pay compensation to the families of Lockerbie bomb victims, the country's foreign minister has said.

The statement by Abderrahmane Chalgam came after Foreign Office minister Mike O'Brien took a big step towards ending Libya's international isolation by holding three hours of talks with Colonel Gaddafi.

Representatives of the Lockerbie families gave a cautious welcome to the announcement, which follows reports that a multi-billion dollar offer is under consideration.

Libya has refused to admit responsibility for the destruction of Pan Am Flight 103 over Lockerbie in December 1988, when 270 people were killed, despite the conviction of Abdelbaset Ali Mohmed Al Megrahi for the bombing.

The latest offer could bring the formal end of United Nations sanctions a step closer - they have already been suspended.

Security Council resolutions require Libya to accept responsibility for the actions of its officials, pay appropriate compensation, prove through its actions that it had renounced terrorism and disclose all its knowledge of the attack on Flight 103.

"This is the first time, I think, that an important member of the Libyan regime has made a comment like this," said Jim Swire, a spokesman for the families of the Lockerbie victims.

"But of course paying compensation is only one of the things that Libya has to do if she wants to get the UN sanctions permanently removed."

While the British government insisted that the issue of compensation was being left to lawyers for the victims' families, O'Brien said Colonel Gaddafi had "said the right things".

Libya said it was considering the issue of responsibility, and foreign minister Chalgam said his country was "ready to get rid of this obstacle".