One British relative said a financial offer would help but said it would be viewed as "blood money" while a bereaved American father condemned Libya outright .

New York law firm Kriendler and Kriendler, which has been negotiating on behalf of some of the families, said Libya was prepared to pay compensation.

It said Libya would offer �1.8bn ($2.7bn) to families of the 270 victims of the bombing, amounting to about �7m each.

Paying us money is all very well but it doesn't bring back our loved ones, you can't actually compensate for the death of those you love by paying money

Dr Jim Swire, UK relative

The Libyan Government later said it had "nothing to do with this so-called agreement".

However, it did reveal that Libyan businessmen and lawyers had held talks with lawyers of the families, though it had not been informed officially about the negotiations.

A Libyan intelligence offer has been convicted of planting the bomb which blew up a Pan Am flight over the Scottish town of Lockerbie in 1988 but Tripoli has never admitted responsibility for the bombing.

According to the lawyers, the Libyans laid down conditions for the release of the money, including the lifting of UN and US sanctions and the removal of Libya from the US list of countries sponsoring terrorism.

Prior to the Libyan denial, there was a cautious reaction from one British relative.

The Reverend John Mosey, who lost his 19-year-old daughter Helga in the atrocity, said the money could go some way towards "lightening the burden" of his family's tragic loss.

Rev John Mosey: "Blood money"

He said: "Obviously it's just another chapter closed and one can't pretend that one isn't pleased.

"One isn't unhappy to have a little more money, but it's not compensation, it's blood money."

He said he would only believe Libya would hand over the money once he sees a cheque, and he repeated the families' demands for an independent inquiry into the tragedy.

US relative Dan Cohen, who lost his daughter Theodora, said he would view any offer with contempt.

He said: "The first condition is, hey, you get your first four million dollars when the sanctions are officially lifted on Libya in the United Nations.

"Libya's got to do something else too, they've got to come clean on this. That's not the one that concerns me, it's what happens after that that really bothers me and bothers me is a mild term, for God's sake.

'Left numbed'

"Then the next two million comes through when Libya is taken off the terrorism list, well I don't want Libya taken off the terrorism list in the United States, I'll be damned if I'm going to become a cheerleader to rehabilitate the person who murdered my daughter."

UK relatives spokesman Dr Jim Swire, whose daughter Flora was among the victims, said money was merely a political bargaining tool and would mean very little to the bereaved.

He said: "Paying us money is all very well but it doesn't bring back our loved ones, you can't actually compensate for the death of those you love by paying money.

Jim Swire: "Political bargaining"

"Money would be very welcome, of course, but don't imagine that this is anything other than an international political deal in which we are on the sidelines.

"We discover only by chance through a Libyan-sponsored press conference that negotiations are going on on our behalf, extraordinary, isn't it?"

Lockerbie councillor Marjory McQueen said she was "left numbed" by the lawyers' claims.

She said no amount of money could compensate for the loss of loved ones.

"You just don't really know what to think about this or how to react," she said.

"It is impossible to put a monetary value on a person's life and I have been left cold by this announcement, even though to some this might sound like a lot of money."

Robert Monetti, president of the US Victims of Pan Am 103 support group, said he believes it will not be long before Libya accepts responsibility for the bombing.

He said: "I'm optimistic about the progress being made in the diplomatic negotiations.

"There has been been progress and we could see Libya accepting responsibility in the near future."