Britain has taken the diplomatic lead in ending Libya's international isolation, and Blair's visit - the first by a British leader since al-Qadhafi assumed power in 1969 - is al-Qadhafi’s reward for dismantling his nuclear weapons programme and renouncing "terrorism".
Blair received a red-carpet welcome from his Libyan counterpart Shukri Ghanim on Thursday and the foreign minister, Abd al-Rahman Shalqam, before his motorcade headed off for a desert tent on the outskirts of Tripoli where he was to meet al-Qadhafi.
Some in Britain have criticised the country's strengthening ties with the state long considered a pariah. But Blair said countries that cooperate with the international community should be welcomed back into the fold.
And British companies, including Royal Dutch/Shell and British Aerospace, are already looking for business in Libya, said British officials.
Blair's official spokesman said on Thursday that Shell was preparing to sign a $200 million deal for gas exploration rights off the coast of Libya.
Historic moment: Blair (L) poses
Without providing specific details, Blair's official spokesman told reporters en route to Tripoli that the deal, to be signed in Libya, was potentially worth $1 billion.
Blair aides said Libya could expect cooperation with its defence needs and Britain would, in time, push for a European Union arms embargo to be lifted. Libyan officers may be invited to train in Britain, as al-Qadhafi himself did as a junior army officer in 1966.
Since Libya announced in December that it would scrap its weapons of mass destruction, it has shipped hundreds of tons of equipment associated with its nuclear programme to the US and is allowing international inspectors to destroy or secure chemical stockpiles.
Britain has a history of grievances with al-Qadhafi who supplied weapons to the Irish Republican Army (IRA) in the 1980s.
Relations hit rock bottom after Tripoli was implicated in the bombing of a Pam Am jetliner over Lockerbie, Scotland, that killed 270 people in 1988.
The two countries restored diplomatic relations in 1999 after Libya accepted responsibility for the shooting of a British policewoman outside of the Libyan embassy in London. Tripoli apologised and agreed to pay her family compensation.
Relations further improved after al-Qadhafi’s government took responsibility for the Lockerbie bombing and agreed to pay compensation to relatives of the victims, a move that resulted in the lifting of UN sanctions against Libya.
Ties have also improved with the US. In the highest-level meeting in decades, a US envoy gave al-Qadhafi a letter from US President George Bush commending Libya's progress in eliminating weapons of mass destruction earlier this week.
However, Washington remains more sceptical than London about Libya's return to the mainstream.
US officials are demanding Libya further improve its human rights record and end alleged support for "terrorism" before Washington restores diplomatic relations and removing wide-ranging sanctions.