The US is to renew full diplomatic relations with Libya after deciding to remove it from its list of countries that support terrorism.
Ties with Libya's leader Gaddafi were frozen for more than 25 years
The US has not had normal relations with Libya since 1980, and blamed it for the 1988 Lockerbie bombing.
It lifted many economic sanctions and restored some ties in 2004 after Libya renounced weapons of mass destruction.
The US secretary of state said Libya had since shown a "continued commitment to its renunciation of terrorism".
Announcing the move to renew diplomatic ties, Condoleezza Rice praised Libya for its "excellent co-operation" in the US-led war on terror.
1980: US ends diplomatic ties with Libya
1986: Libya blamed for killing US troops in Berlin disco bomb
1986: US jets bomb Libyan capital and military bases
1988: Pan Am jet explodes over Lockerbie; Libya blamed
1999: Libya hands over Lockerbie bomb suspects
2003: Libya says it will give up WMDs and long-range missiles
2006: US says it will restore full diplomatic ties with Libya
Washington will upgrade its liaison office in the Libyan capital, Tripoli, to a full embassy.
Monday's decision was the result of successful diplomacy and came after a careful review of Libya's behaviour since 1993, a senior state department official said.
David Welch, US Assistant Secretary of State said it showed that when a state "adhered to international norms [it] will reap concrete benefits".
Tripoli hailed the move as "a significant step on the way to strengthening links" between the two countries.
Correspondents say the move was a highly anticipated decision that Libya felt was long overdue.
US TERROR BLACKLIST
Tripoli's removal from the US list of state sponsors of terrorism will lift restrictions on foreign aid and arms exports, and is expected to boost economic activities between the two countries.
The announcement comes more than 25 years after diplomatic relations were severed following the 1979 sacking of the US embassy in Tripoli by protesters.
The US carried out air attacks on Libya in 1981 and 1986 and Tripoli was held responsible for the 1988 bombing of a Pan Am flight over Lockerbie, Scotland, which killed 270 people.
In 2003 Libya accepted legal responsibility for the attack and has since paid compensation to relatives of the victims.
It is also reported to have helped Western intelligence agencies with information about the Pakistan underground nuclear network.
In September 2004 President Bush ordered the end of many economic sanctions against Libya and allowed air flights between the two countries.
The restoration of full ties was delayed over concerns about Libya's human rights record, which the assistant secretary of state said must continue to improve.