The 15-member council voted 13-0 to lift the sanctions imposed on Libya following the 1988 mid-air bombing of a Pan Am Flight over Lockerbie in Scotland.
France and the United States surprisingly abstained from the voting, that brought to an end a 15-year old saga of collective international action against Libya.
Libya responded to the lifting of the sanctions with expected glee and urged all countries to resume ties with it.
"We welcome the Security Council decision, which shows that Libya has kept all its promises and respects international law and legality," Mohammad al-Zuai, Libya's ambassador to London said.
The US had initially pressed for the adoption of the resolution last month, after Tripoli took blame for the Lockerbie bombing, renounced terrorism and agreed to pay $ 2.7 billion compensation to the victims' families.
US Deputy Ambassador James Cunningham cautioned that the council vote "must not be misconstrued by Libya or by the world community as tacit US acceptance that the government of Libya has rehabilitated itself."
"We welcome the Security Council decision, which shows that Libya has kept all its promises and respects international law and legality"
"The United States continues to have serious concerns about other aspects of Libyan behaviour including its poor human rights record, its rejection of democratic norms and standards, its irresponsible behaviour in Africa, its history of involvement in terrorism and most important, its pursuit of weapons of mass destruction and their means of delivery," the ambassador said.
But a safe passage for the resolution to end the sanctions was guaranteed since France after initial opposition dropped its objections against it, after Libya agreed on a compensation deal with families of the 1989 UTA airliner bombing.
The UN sanctions against Libya included an air and arms embargo. Its ending is more symbolic in nature because the UN had suspended the sanctions since 1999, when Libya turned over two bombing suspects for trial.
But the formal lifting of the sanctions means that compensation to the families of the Lockerbie victims would now be paid.