Libya has agreed to pay $35m to compensate some victims of the bombing of a Berlin nightclub in 1986.
Three people were killed in the bombing
The deal came in talks between Tripoli and lawyers for German victims of the attack at La Belle disco.
Three former employees of the Libyan embassy in Germany were convicted of carrying out the bombing, which killed three and injured about 230 others.
The settlement is expected to pave the way towards the restoration of trade and aid links between the EU and Libya.
In its first reaction to the deal, the German government said it opened the way for Chancellor Gerhard Schroeder to visit Libya.
Germany said it was ready to help modernise the Libyan economy.
The deal represents another step towards ending Libya's pariah status, in a process that began a year ago when Tripoli formally accepted responsibility for the 1988 Lockerbie plane bombing and agreed to pay $2.7bn to families of the victims.
Libya has since made further efforts to mend ties with the West, including a $170m payout to relatives of 170 victims of the bombing of a French UTA airliner over the Sahara in 1989.
The settlement was reached after talks at a secret location in Berlin. A German lawyer involved in the negotiations also confirmed that a deal had been struck.
April 1999: Libya hands over suspects in bombing of Pan Am flight over Lockerbie
January 2002: The US and Libya reveal they are in talks to improve relations
August 2003: Relatives of Lockerbie victims agree $2.7bn payout from Libya; Tripoli takes responsibility for the bombing
September 2003: UN Security Council votes to lift sanctions
December 2003: Libya announces it will halt programmes to develop weapons of mass destruction
December 2003: UN nuclear inspectors begin checks
January 2004: Relatives of 170 victims of the bombing of a French airliner in 1989 sign a $170m payout deal with Libya
The payout does not cover US victims and their families, who are the subject of separate legal action in the United States.
Washington welcomed the news of the agreement but said that the claims of US victims still had to be resolved.
"We've made it clear to the Libyans in numerous meetings... that this is an issue of importance to us, and we are following it closely," State Department spokesman Adam Ereli said.
La Belle disco was known as a hangout for US soldiers stationed in Berlin in the 1980s, when the city was still divided into sectors during the Cold War.
Two American servicemen and a Turkish woman were killed in the 1986 attack.
In response, the United States bombed two Libyan cities, killing 15 people, including Libyan leader Colonel Gaddafi's adopted daughter.
In 2001, a German court ruled that the Libyan secret service was responsible for the bomb attack.
Three former employees of the Libyan embassy in east Berlin and the wife of one of them were convicted of carrying out the bombing.