Libya reached agreement with the United States and Britain on Tuesday to accept responsibility for the 1988 Lockerbie bombing and compensate victims' families, a source close to the talks told Reuters. The deal would end a lingering dispute between the Western powers and an Arab state shortly before a possible U.S.-led war against Iraq.

"History is in the making. We are at a turning point and have entered the final phase to close this file within the next few days," the source said after U.S. Assistant Secretary of State William Burns met Libyan and British officials in London.

After initially saying an announcement was likely "at any moment," the source said it might be withheld until relatives of the victims had been informed.

Under the arrangement, Libya would compensate families of the 259 mostly American passengers and crew killed in the mid-air explosion of the Pan Am flight over the Scottish town of Lockerbie in 1988 and 11 people killed on the ground.

Tripoli will pay up to DLRS. 10 million per victim into a special trust account in return for a series of steps to remove U.N. and U.S. sanctions against it, the source said.

That would make the total value of the settlement roughly DLRS. 2.7 billion if all the conditions were met.

A Libyan intelligence agent, Abdel Basset al-Megrahi, handed over by Tripoli after long wrangling, was convicted of the crime in 2001 by a Scottish court sitting in the Netherlands. A second defendant was acquitted. Megrahi lost an appeal last year.

The source said a breakthrough came when Libya was convinced that by making a statement of responsibility it would be accepting civil liability for the acts of a state employee, not criminal responsibility for the Lockerbie bombing.

The key advance came last Friday when the two sides finalized the exchange of legal drafts.

The source said the next step was for Libya to write to the United Nations secretary-general, using the form of words for acceptance of responsibility agreed with Washington and London.

The two Western powers would then inform the president of the Security Council that Tripoli had met the two conditions set for permanently lifting U.N. sanctions against it.

PHOTO CAPTION

Deal on Lockerbie bombing compensation said to have been reached after U.S. Assistant Secretary of State William Burns (photo) met Libyan and British officials in L