Megrahi's legal team want the document to be released
Prosecutors have said they would accept partial disclosure of secret documents in the Lockerbie bombing appeal as long as national security was not at risk.
Abdelbasset al-Megrahi's legal team wants access to the paperwork to assist with his appeal against conviction.
However, the UK Government has argued that releasing the documents would be against the national interest.
Crown counsel Ronald Clancy QC said "limited disclosure" might be a way to allow the papers to be examined.
Megrahi is currently serving a jail term for the 1988 atrocity in which 270 people died.
The Libyan has already lost one appeal but has been granted a second by the Scottish Criminal Cases Review Commission.
His legal team has been trying to see the secret papers which they believe could help overturn his conviction.
However, Foreign Secretary David Miliband has signed a public interest immunity certificate, claiming making the document public could cause "real harm" to national security and international relations.
A hearing is now under way in Edinburgh to decide on the best way to deal with the documents.
Mr Clancy told the court that limited disclosure - by means of a summary - might be the way forward.
"The principle about involving the defence to the maximum extent looms large here," he said.
"The lord advocate is mindful of the difficulty that the petitioner would have in bringing a ground of appeal without even limited disclosure."
He acknowledged that the advocate general, who represents the UK Government in legal matters north of the border, may be "less enthusiastic" about the idea.
"I don't understand the advocate general to have ruled out limited disclosure at this stage," he added.
On Tuesday, Advocate General Lord Davidson QC asked the court to hold a hearing behind closed doors to discuss the confidential document.
He suggested a security-vetted advocate could represent Megrahi's interests at that hearing to replace his usual defence team.
Margaret Scott QC, senior counsel for the Libyan, has criticised those plans.
"Megrahi's position here is that he wants disclosure of these documents in order to exercise his right of appeal," she said.
"My main concern is any proposed procedure which determines the substance of the appeal taking part in the absence of Megrahi or his defence counsel."