WASHINGTON -- The Bush administration restored full diplomatic ties with Libya yesterday, rewarding a longtime foe for giving up terrorism and unconventional weapons, while tacitly encouraging Iran and other countries to follow suit.
Completing a reversal that began three years ago, Bush administration officials said they will open an embassy in Tripoli and drop Libya from their list of nations that sponsor terrorism. C. David Welch, assistant secretary of state for the Middle East, said the announcement demonstrated that when countries "follow international norms, they will reap concrete benefits."
"Libya serves as an important model as we push for changes in policy by other countries such as Iran and North Korea," he said.
U.S. officials hope the move will encourage Libya to further open its economy, including its underdeveloped oil industry. Libya's oil reserves rank in the top 10 worldwide, but its production lags. After the Bush administration lifted U.S. economic sanctions in 2004, American oil companies joined those doing business in Libya, and Libyan oil began arriving at U.S. refineries that year.
At a morning news conference, Welch denied that the move was driven by an interest in oil but acknowledged that Libya's economy has not opened up to Americans as much as hoped since economic sanctions were lifted.
Libya "remains a problematic place to do business," he said. "We would appreciate greater openness, as would any number of potential foreign partners."
U.S. officials said the Libyan economy has many traditional rules - common to the region - that make it hard for foreign investors to trade and invest. State Department travel warnings note that the credit cards and checks tied to U.S. banks are usually not accepted in Libya, which mostly remains a cash economy. Officials said they hoped that better ties would boost modernization.
Analysts speculated that the Bush administration was eager to publicize the restoration of relations with Libya as a success story that showed, at a time of foreign policy frustrations in Iraq, Iran and elsewhere, that the United States can carry off diplomacy in the Middle East.
"The Bush administration has been looking for ways to show they can walk and chew gum, and solve problems in a sophisticated way, without resorting to bombing," said David Mack, a former senior State Department official who is a vice president at the Middle East Institute in Washington.
The United States closed its embassy in Libya in 1980, at a time when U.S. officials viewed Libyan leader Col. Muammar el Kadafi as one of the most dangerous men in the Middle East. The United States held Libya responsible for a series of deadly terrorist attacks in the 1980s, including the destruction of Pan Am Flight 103 over Lockerbie, Scotland, in 1988, in which 270 people died, mostly Americans.
President Ronald Reagan ordered the bombing of Libya in 1981 and 1986. The United Nations and the United States each imposed sanctions on Libya, and Washington sought to isolate it diplomatically.
In 1999, Libya began to give ground, surrendering two suspects for trial in the Lockerbie bombing. In December 2003, it took its biggest step, moving to dismantle its unconventional weapons program and long-range ballistic missiles, leading to the breakthrough on sanctions in 2004.
Since then, the United States has held Libya out as a model of how countries with nuclear or chemical weapons programs should act. U.S. officials have also praised Libya for its cooperation in battling al-Qaida and other terrorist groups, a message they repeated yesterday.
U.S. officials, trying to build international support for the dismantling of Iran's nuclear program, are eager to show Iranians that they are better off abandoning nuclear ambitions than defying other countries.
Secretary of State Condoleezza Rice commended Libya in a statement for its "excellent cooperation" in fighting terrorism.
Yet U.S. officials have moved slowly to restore diplomatic relations and end Libya's inclusion on the terrorist list. Mack, the former ambassador, speculated that the administration wanted to be sure that the unpredictable Kadafi would not change course in a way that could be deeply embarrassing to the White House.
Welch, in an interview, said U.S. officials wanted to be "very, very careful" before normalizing relations that Libya had fully owned up to past behavior and would not repeat it in the future.
The administration's move brought praise from some in Congress, which has 45 days to review it before it takes full effect.
Some relatives of those killed in the Lockerbie bombing voiced outrage, while others were concerned about the fate of a complex legal agreement. Under a settlement with relatives of the 270 victims of Pan Am Flight 103, Libya has paid each family $8 million and is scheduled to pay $2 million more once it has been removed from the U.S. terrorism list.