Al-Megrahi, who is terminally ill with prostate cancer, is serving a life sentence with a minimum term of 27 years after he was found guilty by three Scottish judges sitting in an extraordinary tribunal in The Netherlands.
The latest move by the Libyan government comes after Tripoli said it had signed a judicial co-operation agreement with Britain, which includes an accord on the extradition of prisoners.
Last week, his lawyers began an appeal against his conviction at a court in Edinburgh, saying the case against him was flawed.
"If he is found
guilty then the government has to decide where he serves the remainder of his term"
Al-Megrahi, who has repeatedly protested his innocence, lost an appeal in 2002 and last year failed to secure his release on the grounds he was dying.
Jim Swire, whose daughter Flora was killed in the attack, welcomed the move to send al-Megrahi home.
"I am not opposed to this simply because I don't believe the man is guilty as charged and I don't think Megrahi should be in prison," he said, adding that it was only "right" Megrahi should be allowed home.
However, Barrie Berkley, whose son Alistair died, said he hoped the latest appeal would continue.
"We want the appeal to go through because it's the main means of us getting further information about how our family members died ... We really want to know whether the Libyans were behind this and Megrahi was behind it," he said.
"If he is found guilty then the government has to decide where he serves the remainder of his term. It shouldn't be up to him or the Libyan authorities."
Pan Am flight 103, which was en route from London to New York, was blown up on December 21, 1988.
Of the 259 people killed on board, 189 were Americans. Another 11 people died on the ground.
Four years after al-Megrahi's conviction in 2001, Libya accepted responsibility for the attack and agreed to pay about $2.7bn in compensation.
The move helped clear the way for the lifting of sanctions and the restoration of Libya's ties with Western countries.