Jack Straw points out that the transfer deal was "academic" for Megrahi (left)
Justice Secretary Jack Straw has said reports that the Lockerbie bomber Abdelbaset Ali al-Megrahi was released over an oil deal are "wholly untrue".
He denied a "back door deal" was done to transfer Megrahi because of UK trade talks with the Libyan government.
Letters leaked to a newspaper show Mr Straw agreed not to exclude him from a prisoner transfer deal in 2007 because of "overwhelming national interests".
Terminally ill Megrahi was recently released on compassionate grounds.
Pictures of Megrahi being treated in a Libyan hospital were shown on UK TV for the first time on Sunday.
A team from Channel 4 News were invited into his room, but he was reportedly too sick to answer any questions about claims his release was linked to a trade deal.
Scottish Justice Secretary Kenny MacAskill released Megrahi on 20 August, eight years into his 27-year sentence for murdering 270 people in the 1988 bombing of Pan Am 103.
Scotland's First Minister Alex Salmond said the convicted bomber was released from a Scottish jail with no London involvement.
He was not released under the prisoner transfer agreement.
Jack Straw denied Megrahi's release was part of a covert deal
The British government has always maintained the decision to release Megrahi rested with Scotland, but revelations in the Sunday Times will fuel suspicions about the motivations behind his release, BBC correspondent Norman Smith says.
Opposition parties are calling for an inquiry.
Leaked ministerial letters reveal UK Justice Secretary Jack Straw's change of stance over Megrahi's inclusion in the prisoner transfer agreement (PTA).
According to the Sunday Times, Mr Straw wrote to his Scottish counterpart Kenny MacAskill on 19 December 2007, six weeks before an oil exploration contract for BP in Libya was ratified.
The letter said: "I had previously accepted the importance of the al-Megrahi issue to Scotland and said I would try to get an exclusion for him on the face of the agreement. I have not been able to secure an explicit exclusion.
"The wider negotiations with the Libyans are reaching a critical stage and, in view of the overwhelming interests for the UK, I have agreed that in this instance the [PTA] should be in the standard form and not mention any individual."
Responding to the report, Mr Straw said on Sunday that the "normalisation of relations with Libya" was in the UK's interests.
He said this was because they had uncovered "a huge nuclear weapons programme of the Libyans, which they had been conducting wholly in secret".
"As a result of painstaking, secret negotiations over months, an agreement was struck with them in December 2003 that they would allow the international atomic energy inspectors in to supervise the whole dismantling of their nuclear weapons programme.
"And yes, as part of that there would be gradual normalisation of relations with Libya, with the West as whole, not just with the United Kingdom.
Mr Straw said a prisoner transfer agreement was part of that agreement.
"But was there a deal? A covert, secret deal ever struck with the Libyans to release Megrahi in return for oil? No, there was not and there is no evidence whatsoever because it is untrue."
Normalisation of relations
He said the Scottish government had sought a "carve-out" in any treaty, which he had supported, but in the event the Libyans had said they would not find that acceptable.
"And they said that for two reasons. One that it wasn't necessary. And they were correct about that, because a veto was in the hands of the Scottish government anyway, but secondly, they said, if you are after the normalisation of relations what we want is simply a stand, normal prisoner transfer agreement.
If the government fails to provide a full account of its conduct it will simply add to speculation
"Not one that carves out in respect of any one prisoner."
He also emphasised the Megrahi had not been released under a PTA, but quite separately under the jurisdiction of the Scottish government.
Liberal Democrat MP Sir Menzies Campbell, a member of the Commons foreign affairs select committee, said: "Jack Straw's intervention has simply muddied the waters.
"We need a full and frank comprehensive statement about the extent to which Mr Megrahi's fate may have featured in any trade negotiations between the United Kingdom and Libya.
"If the government fails to provide a full account of its conduct it will simply add to speculation.
"This is a matter which the foreign affairs select committee may well consider justifies investigation."
David Lidington, the Conservatives' foreign affairs spokesman, said leaks and "secrecy" around the case were damaging to international relations and public trust.
He called for an independent inquiry by a parliamentary select committee to examine all the documents involved and determine "what did and did not happen".
The BBC's political correspondent Norman Smith said the story would fuel the suspicions of those who felt the "bottom line" was oil.
The letters, he added, also suggested the British government was a good deal more involved in the release, and they were prepared to see him released under the transfer accord.
Scottish First Minister Alex Salmond said it was a matter of record that his administration had opposed the prisoner transfer agreement between Westminster and Tripoli.
"We didn't think that the Lockerbie decision should be linked to trade or oil decisions by anyone who looked at the coincidence that the prisoner transfer agreement was being negotiated at the same time as commercial contracts," he told the BBC.
Despite opposition on both sides of the Atlantic, the SNP leader added there was "huge international support" for the Scottish government's decision.
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