Britain denies deal with Libya

"The idea that the British government, the Libyan government, would sit down and somehow barter over the freedom or the life of this Libyan prisoner and make it all part of some business deal ... it's not only wrong, it's completely implausible and actually quite offensive," Business Secretary Peter Mandelson said.

London and Washington have roundly condemned the "hero's welcome" given to the dying Abdel Basset al-Megrahi on his return home after being freed from a life sentence in a Scottish jail on compassionate grounds.

Gaddafi met Megrahi on Friday, giving him a warm embrace and getting a kiss in return, expressed gratitude to Prime Minister Gordon Brown and the Queen and said their encouragement of Scotland to free him would improve ties.

"This step is in the interest of relations between the two countries ... and of the personal friendship between me and them and will be positively reflected for sure in all areas of cooperation between the two countries," he told Libyan TV.

His son Saif al-Islam went further, saying that whenever he had met British officials to discuss business, the issue of Megrahi's release had been a condition of any deal being struck.

Mandelson said he had met Gaddafi's son twice in the past year and the issue of the Lockerbie bomber had been raised both times, but his release was not tied to business deals.

"It's not only completely wrong to make any such suggestion or insinuation, it's also quite offensive," he told reporters.

Megrahi, 57, denies he was once a Libyan intelligence agent and was responsible for the bombing, in which a Pan Am jet carrying 259 passengers -- most of them American -- was blown up over Lockerbie in Scotland in December 1988, killing all those on board and 11 people on the ground.

After years of wrangling and sanctions, Libya handed him over for trial and he was sentenced by a special Scottish court sitting in the Netherlands in 2001. He was freed on Thursday because of his terminal prostate cancer.