President Bush (search) on Monday removed a ban on commercial air service to Libya (search) and released $1.3 billion in frozen Libyan assets in recognition of "significant" steps to eliminate its deadliest weapons programs.

In response, Libya is expected to disburse $1 billion in compensation payments to 269 families of the victims of the 1988 Pan Am 103 bombing (search).

Libya, which has acknowledged responsibility for the bombing, had conditioned release of the money on an end to the two sets of U.S. sanctions. It had established a Wednesday deadline for Bush to act.

White House press secretary Scott McClellan said Bush lifted the sanctions by signing an executive order.

He credited Libya with having taken significant actions over the past nine months to eliminate its chemical, biological and nuclear weapons programs.

"Concerns over weapons of mass destruction no longer pose a barrier to the normalization of U.S.-Libyan relations," McClellan said.

He added that Libya facilitated the removal of all significant elements of its declared nuclear weapons program and began a process of converting a chemical facility at Rabta to a pharmaceutical plant.

The country also destroyed chemical munitions and removed highly enriched uranium for its research reactor and equipment for uranium enrichment, he said. Libya also eliminated one class of Scud missile and agreed to eliminate another, he added.

"They have pledged to halt all military trade with countries of proliferation concern and increased our understanding of the global black market in the world's most dangerous technologies," McClellan added.

Libya's disarmament plan has led to a substantial improvement in ties with the government of Libyan leader Moammar Gadhafi, once considered to be among the most dangerous of U.S. adversaries. During the 1980's, President Reagan twice ordered air strikes against Libya.

Still on the books is Libya's inclusion on the State Department's list of state sponsors of terrorism, which substantially restricts commercial activities between the two countries.

State Department spokesman Adam Ereli said terrorism remained a concern and cited reports that Libya may have been involved in an attempt on the life of Saudi ruler Crown Prince Abdullah.

In the Pan Am bombing, all 259 people on board were killed, including 189 Americans. Also killed were 11 people on the ground in Lockerbie, Scotland.

Families of the Pan Am victims are expected to receive $4 million each that has been held in an escrow account. The families had received a similar payment of $4 million each after United Nations sanctions against Libya were lifted last year.

If Libya is removed from the terrorism list, a final payment -- $2 million per family -- would be made, bringing the total to $10 million for each.

Gomaa Abou el Kheir, an official in Libya's information ministry, told Al-Jazeera television in a telephone interview that the new step is a "positive one" in the way of ending the outstanding disagreements with the United States.

"This is the result of open diplomacy. The diplomacy of dialogue achieved results for both sides," el Kheir said, adding that both Libya and the United States will benefit from the decision.

Rep. Tom Lantos of California, ranking Democrat on the House International Relations Committee, said, "This victory is thanks to more than two decades of tough multilateral sanctions and firm diplomacy sustained through Democratic and Republican administrations."

He said that during his two visits to Libya this year, "it became clear to me that this decision is irreversible, and that the Libyan leadership has made a firm commitment to building new bridges to the United States and other civilized nations."

Kara Weipz, president of Victims of Pan Am Flight 103, said that if the president has determined that Libya has "given up its weapons of mass destruction and its missiles, then this is the appropriate thing to do." Weipz's brother, Richard, was killed on the flight.

Libya has substantial oil reserves. American oil companies had been barred from doing business there from 1986 until earlier this year, when the administration first started to ease sanctions.

Wynn Segall, of the Akin Gump Strauss Hauer & Feld law firm, said that as a result of terrorism list sanctions, important U.S. oil technology and equipment sales to Libya are still barred.

"This includes U.S. technology critical to commercial exploration, production and development projects in Libya's energy sector, which is the key to economic revitalization of the country," he said.