The US says Libya is committed to shunning terrorism
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Libya has hailed Washington's decision to renew full diplomatic ties with Tripoli as an "important step" which will help reinforce world peace.
Libya's Foreign Minister, Abdel Rahman Shalgham, said it heralded a "new page" in relations between the two countries.
The US severed diplomatic links with Libya in 1981, and later 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.
Making the announcement on Monday, US Secretary of State Condoleezza Rice said Washington would also remove Libya from the US' list of state sponsors of terrorism.
'Not a reward'
Libya's foreign ministry information chief, Hassuna al-Shawesh, said the move would "give a major boost to economic and political ties" between the two countries.
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LIBYA-US RELATIONS
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
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In a statement, the foreign ministry said restoring ties was "an important step towards strengthening and promoting bilateral relations in all fields for the interests of both countries and for strengthening international peace and stability".
Ms Rice said Washington took the decision "in recognition of Libya's continued commitment to its renunciation of terrorism" and its "excellent co-operation" in the US-led war on terror.
But Mr Shalgham denied the move was a reward for Libya's decision to give up its weapons of mass destruction programme.
"This is not true," he told al-Jazeera television. "This decision was the result of numerous contacts and meetings.
"As for this reward talk, politics knows no rewards, it knows interests, relations and calculations."
Years of enmity
Correspondents say the move was a highly anticipated decision that Libya felt was long overdue.
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HAVE YOUR SAY
It is right to renew ties for the same reasons as it was right to renew ties with Germany and Japan after the World Wars
Tom McLaughlan, Western Isles, UK
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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.