Jack Straw points out that the transfer deal was "academic" for Megrahi (left)
Justice Secretary Jack Straw dropped a demand to exclude the Lockerbie bomber from a Libyan prisoner transfer accord, the Sunday Times has reported.
Letters leaked to the paper say Mr Straw wanted to exclude Abdelbaset Ali al-Megrahi from the accord.
He backed down citing "overwhelming" UK interests. A major oil deal was being discussed at the time.
Mr Straw called the news "academic" - as Megrahi was freed on compassionate grounds, not under the transfer accord.
And he stressed that the Scottish authorities would still have had a veto over any move to send Megrahi home under the transfer agreement.
A stalled oil deal was ratified by the Libyans six weeks after the government dropped its bid to exclude him from the prisoner transfer agreement (PTA), the paper says.
Mr Straw's change of stance over Megrahi's inclusion the transfer agreement came at a crucial time in negotiations over an oil exploration contract for BP worth billions of pounds.
The paper says Mr Straw wrote to his Scottish counterpart Kenny MacAskill on 19 December 2007 and said: "I had previously accepted the importance of the al-Megrahi issue to Scotland and said I would try to get an exclusion for him on the face of the agreement. I have not been able to secure an explicit exclusion.
There was no U-turn, says Mr Straw
"The wider negotiations with the Libyans are reaching a critical stage and, in view of the overwhelming interests for the UK, I have agreed that in this instance the [PTA] should be in the standard form and not mention any individual."
Edward Davey, the Liberal Democrat foreign affairs spokesman, told the Sunday Times: "This is the strongest evidence yet that the British government has been involved for a long time in talks over Megrahi in which commercial considerations have been central to their thinking."
Mr MacAskill released Megrahi on 20 August on compassionate grounds, eight years into his 27-year sentence for murdering 270 people in the 1988 bombing of Pan Am 103.
Megrahi has since backed calls for a public inquiry into the bombing, saying he is determined to clear his name.
Mr Straw has denied suggestions that the release was linked to Britain's commercial interests.
"The negotiations over a prisoner transfer agreement were part of a wider agreement for the normalisation of relations with Libya as part of bringing them into the international community," he said.
"It was always made clear to the Libyans that, as with all other such agreements, the sentencing jurisdiction - in this case Scotland - had a right to veto any individual application, including that of any application from Mr Megrahi.
"Not withstanding ministers' right of veto, the Scottish Executive wanted a specific carve-out from the PTA treaty in respect of Mr Megrahi. I gave instructions to British negotiators to try to secure this.
"However, such an exclusion went beyond the standard form of PTA treaties and in the event an agreement for a PTA in the standard form - including the rights of veto of any application - was agreed.
"All this, however, is academic as Mr Megrahi was not released under the PTA treaty but quite separately by the Scottish Executive on compassionate grounds.
"The Scottish Executive also refused his PTA application. This process was made clear at every stage to Libyan negotiators."