Libya's reported offer of compensation over the bombing of a Pan Am flight in 1988 has been welcomed by US Secretary of State Colin Powell as a "step in the right direction".

"We are waiting to see what the actual Libyan offer is. It's not yet formally put on the table", Mr Powell said.

UN demands that Libya must:

Admit responsibility Disclose all it knows about Lockerbie case Compensate victim's relatives Renounce terrorism

There is still confusion about the precise status of any deal after Libya denied suggestions by a New York law firm that it offered $2.7bn to compensate the victims' families as part of a deal to lift United Nations sanctions.

"Libya has nothing to do with this so-called agreement and is not a party to it," an official statement said.

However, it conceded that Libyan businessmen and lawyers had held talks with lawyers of the families, though it said it had not been informed officially.

Pan Am Flight 103 exploded in mid-air and crashed in Lockerbie, Scotland

The BBC's Justin Webb in Washington says Libya's denial could be meant for domestic political consumption.

But he adds that it underlines the difficulties the world community has in dealing with Libya's leader, Muammar Gaddafi, and the potential for any deal to fall apart.

A partner in Kreindler and Kreindler - the firm representing the victims' families - told the BBC that he expected Libya to admit responsibility for the bombing very soon - perhaps within a couple of weeks.

'$10m per victim'

The British Foreign Office said Libyan, British and American officials were due to meet in London on 6 June to discuss the question.

Under the reported deal, each victim's family would receive $10m, but 40% of the total money would be disbursed when UN sanctions were lifted and another 40% when the US sanctions were removed.

Gaddafi is keen to put an end to the affair

The remaining 20% would be paid when Libya was removed from the US State Department's list of sponsors of international terrorism.

The UK Foreign Office welcomed the offer, if genuine, as "a sign that Libya wishes to respond to the requirements of the UN resolutions".

However, a spokesman also said that Libya would need to comply with all UN resolutions for sanctions to be lifted.

The admission of responsibility is a particular sticking point with officials and relatives alike.

'Blood money'

Last year, a Scottish court convicted a Libyan intelligence agent, Abdelbaset Ali Mohmed Al Megrahi, for the mass murder and for smuggling an explosive aboard the flight.

The other co-defendant, Al-Amin Khalifa Fhimah, was acquitted.

Officially, Libya has refused to admit liability, but Colonel Gaddafi is known to be keen for his country to return to the international fold.

The relatives also want to see Libya confess its guilt in the affair.

"If Libya is still not willing to acknowledge they planned and committed the mass murder of 270 people and issue and comply with all of the conditions of the US Government and UN security council - then everything given to the families would be blood money," said Vicky Cummock, whose husband was killed.