Gaddafi's government took responsibility for the Lockerbie bomb
Libya has admitted trying to develop weapons of mass destruction (WMD) - but has promised to dismantle its programme.
BBC News Online looks at the main issues arising from Tripoli's decision.
Q: What is known about Libya's WMD programme?
A: Until now, not much, although arms control experts have long believed that Colonel Muammar Gaddafi's regime had a number of clandestine programmes.
In two trips to Libya in October and December this year, US and British experts were shown "the substances, equipment and programmes" that could lead to the production of banned weapons.
The experts saw "a significant amount of mustard chemical agent", according to a US official.
This had been produced more than a decade ago at a plant in Rabta, now believed to be inactive.
According to previous US estimates, Libya had made its greatest strides with chemical weapons, producing about 100 tons of mustard gas and nerve agents in the 1980s.
A CIA report released to the US Congress in November said: "Tripoli still appeared to be working towards an offensive CW (chemical warfare) capability and eventual indigenous production."
The report added: "Evidence suggested that Libya also sought dual-use capabilities that could be used to develop and produce BW (biological warfare) agents."
US officials said Libya had also acknowledged co-operating with North Korea to develop extended-range Scud missiles, as its ageing Scud missile force was of only limited use.
Q: What is known about Libya's nuclear intentions?
A: Bush administration officials say Tripoli's most significant acknowledgement was that it had a programme intended to enrich uranium for use in nuclear weapons.
The US and British team visited 10 sites related to Libya's nuclear programme, which was more advanced than previously thought.
The experts saw components of a centrifuge programme to enrich uranium but did not see a fully operational system.
Some UK officials have said that before the deal, Libya was close to obtaining nuclear weapons capability.
However, the CIA report said Libya had made little progress in developing or acquiring a nuclear weapon.
Libya - which signed the Nuclear Non-Proliferation Treaty (NPT) - has a Soviet-made research reactor at Tajura that is under International Atomic Energy Agency (IAEA) safeguards.
But several Western diplomats have said there were indications that Libya had been trying to kick-start its nuclear programme by gathering a team of nuclear experts form ex-communist states in Eastern Europe.
The diplomats said that "segments of the IAEA have become very concerned about Libya," Reuters news agency reported.
Q: Why Libya has decided to come clean now?
The key factors have been growing pressure from the West and Colonel Gaddafi's desire to take his country back into the international fold, analysts say.
They say the process of Libya's gradual rehabilitation started earlier this year, with the agreement on a compensation deal over the Lockerbie bombing.
The move was rewarded by lifting of the United Nations sanctions against Libya in September.
Experts say that economic reasons have also played a major part in Libya's decision to abandon its WMD programme.
Tripoli currently does not have the means to pursue such a programme and is also too dependent on Western markets to sell its oil.
Q: Is the US likely to lift its unilateral sanctions on Libya?
Tripoli will certainly be hoping that Washington will follow the UN example.
President Bush has praised Libya's decision to abandon WMD programmes and hinted at better relations with the US.
And an end to sanctions could allow US oil companies back into Libya where they once produced more than one million barrels per day.
But US officials have cautioned against expecting any immediate lifting of sanctions.
"We are at the start," one official said. "We're taking it one step at a time."
Q: What effect will Libya's decision have on other pariah countries with nuclear ambitions?
It sets an interesting precedent. Iran and North Korea - the two nations already under heavy pressure from the US to abandon their nuclear programmes - are now expected to feel even more heat from Washington.
In an apparent warning to Tehran and Pyongyang, President Bush said in his statement that he hoped "other leaders will find an example".
According to some analysts, Syria could also come under increasing pressure over its weapons programme.