Libya had agreed to pay up to $10 million in phases to the families of the 270 people killed when Pan Am Flight 103 blew up over Lockerbie, Scotland, in December 1988, with the final $2 million contingent on Tripoli getting off the terrorism list.
Under the deal, $4 million was paid to each family after UN sanctions were removed in September 2003 and $4 million more was paid after US commercial sanctions were scrapped a year later.
The remaining $2 million was to be paid when Libya was dropped from the US terrorism list.
In 2003 the Libyans put $2.7 billion in an escrow account (an account held by a third person until a deal is completed between two parites )at the Bank for International Settlements to fund the deal.
An American official said Libya had asked for the remaining money to be moved from the account to a Libyan account at the BIS "for 30 days to see if issues can be worked out between the parties that would permit the escrow to be revitalised".
A lawyer for the families, two US officials and the father of one victim said Libya declined to extend the agreement.
It expired on Thursday after having previously been extended seven times because of Tripoli's desire to keep improving relations with Washington and avoid antagonising the families.
US-Libyan relations have thawed dramatically over the past two and a half years because of Libya's 2003 decisions to accept responsibility for the Lockerbie bombing and to give up pursuit of weapons of mass destruction.
A US official suggested Libya might now be trying to get the families to pressure the United States to drop it from the terrorism list, but this would not work.
"We are going to decide this on a policy basis"
"We are going to decide this on a policy basis," said the official. "I am not aware of any effort in the near term to drop them from the terrorism list. [The families] understand as much as we do that this has got to be a policy decision. They are not pushing us."
Jim Kreindler, a lawyer who represents families of many of the victims, said he was confident the matter would be worked out, that Libya would eventually get off the list and the families would be paid.
He said he did not know what had motivated the Libyans to allow the agreement to expire, but that some Libyan officials had hoped their country would by now have been dropped from the terrorism list, which imposes a number of US sanctions.
"I think they thought things would happen faster"
Lawyer reperesenting families
of the victims
"I think they thought things would happen faster," Kreindler said. "I still believe by the end of the day the families will receive $10 million."