Any solution hinges on Libya admitting responsibility for the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, that killed all 259 passengers and 11 people on the ground.

Libya wants to end international sanctions that have crippled the oil-rich country’s economy.

"I think that we're getting closer to a settlement," Powell told reporters but said he had not yet received a report on working discussions among US, British and Libyan officials.

"We were pleased with the progress made today," an unidentified British Foreign Office spokeswoman told Reuters. "It was a constructive session."

Compensation

Each of the 270 bereaved families could receive up to $10 million, depending on how quickly the US removes Libya from its list of nations that support terrorism.

The trigger for the Libyan admission, long demanded by the United States, may be an agreement on how the compensation would be held. 

Lawyers and diplomats are proposing the money be deposited in an escrow account at Switzerland's Bank of International Settlements, sources familiar with the two-year-long negotiations have said.

Once the documents are agreed and signed, Tripoli would notify the UN Security Council that it assumes responsibility for the bombing. The account will hold $2.7 billion dollars the north African country has agreed to pay in reparations.

United Nations

The United Nations, in turn, would agree to lift economic sanctions. Libya would then hold discussions with the US government in bid to persuade it to follow suit.

The first $4 million will be paid out when UN sanctions are lifted.

If Washington fails to lift sanctions within eight months of UN sanctions ending, Libya will agree only pay a further $1 million in compensation, bringing the total to $5 million per victim.
  
A further $4 million will be paid to each family once US sanctions are lifted, with the final $2 million to be released if the US State Department removes Libya from its blacklist within eight months.

Sanctions suspended
  
United Nations sanctions which were imposed on the country in 1992 were suspended, but not lifted, in 1999 after Libya agreed to turn over two Libyan suspects.

One of the suspects was convicted in 2001 by a special Scottish court sitting in the Netherlands. The other was acquitted.

A month after the conviction, LIbya's president Colonel Qadhafi told journalists he categorically refused to compensate the victims of Lockerbie in exchange for a lifting of sanctions, saying Libya was not obliged to accept compromises or make concessions.

But Washington has insisted that to have sanctions permanently removed Libya must pay the compensation as well as accept responsibility and agree to cooperate in further investigations.

US sanctions include a ban on imports of Libyan crude oil to the United States dating back to 1982.