US President George W Bush says his country is investigating allegations of a Libyan plot to kill the ruler of Saudi Arabia last year.
One account said Colonel Gaddafi had approved the plot
Libya has vehemently denied the charge, describing it as a lie designed to blacken its image abroad.
American newspaper reports have alleged Libyan leader Colonel Gaddafi approved a plan to kill Crown Prince Abdullah.
A State Department spokesman said the investigation would affect the pace of the US rapproachement with Libya.
Spokesman Richard Boucher said the charge was one reason why Libya's name remained on America's list of state sponsors of terrorism.
He said the matter had already been discussed with Libyan officials, who had assured the US they did not support the use of violence to settle political differences.
President Bush told reporters investigations were underway to "to understand the veracity of the plot line".
"When we find out the facts, we will deal with them accordingly," he said.
Relations between Libya and Saudi Arabia have been difficult in recent years, especially since an angry exchange between Colonel Gaddafi and Crown Prince Abdullah at an Arab League summit in March last year.
The Saudi ruler reportedly argued with Colonel Gaddafi last year
However, Libyan Foreign Minister Abdel Rahman Shalgham has dismissed the allegations as baseless and nonsense.
He said the reports in US newspapers were lies intended to poison his country's relations with the international community.
The papers said an investigation had been launched into the allegations.The New York Times quoted US officials as saying a jailed US Muslim activist and a Libyan intelligence officer in Saudi custody had outlined the plot.
But Colonel Gaddafi's son, in an interview with the paper, has said that the allegations are "nonsense".
Officials at the US Department of Justice were unable to comment on the newspaper reports.
Analysts say the allegations, if proved, could reverse US policy towards Libya.
Involvement in a plot to kill a foreign leader, they say, would almost certainly lead the United Nations to restore sanctions against Tripoli.
The sanctions were lifted last year after Colonel Gaddafi renounced weapons of mass destruction and acknowledged responsibility for the 1988 Lockerbie bombing.
Senior officials in the US, UK and Saudi governments have been aware of the investigation for several months, the New York Times said.
They were prompted by detailed testimony from two separate sources who said they were participants in the conspiracy, it added.
Abdurahman Almoudi, a US Muslim activist charged with violating the Libyan sanctions regime and currently in custody in the state of Virginia, reportedly told prosecutors that he had twice discussed the plot with Colonel Gaddafi, who he said had approved it.
Mr Almoudi's statement was offered in the course of plea bargaining which could lead to a reduced prison sentence.
But his story appeared to be backed up by captured Libyan intelligence official Colonel Mohamed Ismael, who allegedly confessed to attempting to recruit Saudis for the assassination attempt.
The Washington Post quoted an unnamed "informed source" as confirming the investigation was going ahead.
The inquiry was said to be examining how far the plot had progressed and whether Colonel Gaddafi was actually involved.