Libya is set to accept responsibility for the Lockerbie bombing and pay a massive compensation settlement.

The country's leader, Colonel Gaddafi, has agreed to accept responsibility for the terrorist bombing of the Pan Am flight 103 15 years ago in which 270 people died.

He has agreed to compensate families of those killed as part of a deal which would lift economic sanctions against Libya.

The agreement was struck between representatives of the Libyan, British and American governments at the United Nations in New York on Tuesday.

"There is now sign-off from all three governments. All that is left are the practical steps," said one UN diplomat.

But there are still problems to be overcome.

Libya will deliver a letter to the UN next week accepting responsibility because the man convicted of planting the bomb on the plane, Abdelbasset al-Megrahi, was a government agent.

But Gaddafi is expected to distance himself from the attack.

Payments are likely to be staggered until sanctions are lifted and Libya is removed from the US State Department's terror list.