WASHINGTON (AFP) - The United States renewed diplomatic ties with Libya, ending a 25-year-old diplomatic battle with Libyan leader Moamer Kadhafi over backing for international terrorism.

Secretary of State Condoleezza Rice also said Libya would be taken off a US list of nations accused of supporting terrorism. She called on Iran and North Korea's hardline leaders to take similar "strategic decisions" to Kadhafi.

The United Nations imposed international sanctions on Libya after the Lockerbie passenger jet bombing in 1988 and other attacks that were blamed on Kadhafi's government.

Rice called the renewal of ties one of the "tangible results" of Kadhafi's decision in 2003 to renounce terrorism and abandon efforts to make weapons of mass destruction.

"I am pleased to announce that the United States is restoring full diplomatic relations with Libya. We will soon open an embassy in Tripoli," Rice said in a statement.

Assistant Secretary of State for Near Eastern Affairs, David Welch, said Libya would come off the list immediately.

Libyan Foreign Minister Abdel Rahman Shalgham hailed "a new page" in relations.

"This turns a new page (between the two countries), in the interests of both peoples," Shalgham told AFP from Tripoli.

"This move was decided several days ago and the two countries will publish an official statement to confirm the resumption of relations at the level of ambassadors as from today," he said.

Rice highlighted the move as an example for Iran and North Korea, which the United States has branded rogue nations and sponsors of terror activities.

"Just as 2003 marked a turning point for the Libyan people, so too could 2006 mark turning points for the peoples of Iran and North Korea," she said.

"We urge the leadership of Iran and North Korea to make similar strategic decisions that would benefit their citizens."

Washington severed ties with Libya in 1981, two years after radical students ransacked the US embassy in Tripoli.

An alleged Libyan-backed attack on a Berlin disco popular with Americans in 1986 spurred the United States to launch air raids against Tripoli, killing 41 people.

Libya's alleged involvement in international terrorism surged to the forefront when a Pan Am passenger jet was blown up over the Scottish town of Lockerbie, killing 270 people in the plane and on the ground.

Following UN pressure, two Libyans eventually stood trial for the attacks at a Scottish court that sat in the Netherlands. In 2003 Tripoli agreed to pay the families of the dead victims millions of dollars each in compensation.

Those steps led to the cancellation of UN sanctions and the slow warming of relations with Washington.

The families of Lockerbie victims said the renewal of relations had been inevitable.

"It's not a surprise, it's surprising it took this long," said Robert Monetti, whose son was killed in the attack.

However, he told AFP, "I don't think I will ever be really comfortable with Libya. The people who blew up Pan Am 103, the ones that were responsible for it, have never been brought to justice. But it is what it is. The countries can not stop doing business just because of things like this."

After Kadhafi agreed to open up Libya's weapons production sites to US and British experts, the United States opened a special interests section in Tripoli in February 2004. This was upgraded to a "liaison office" the same year.

Rice said: "We are taking these actions in recognition of Libya's commitment to its renunciation of terrorism and the excellent cooperation Libya has provided to the United States and other members of the international community in response to common global threats faced by the civilized world since September 11, 2001."

Congressman Tom Lantos, the ranking Democrat on the House of Representatives International Relations Committee, hailed the move.

"Based on my observations from five visits to Libya in the past 30 months, these decisions are fully warranted," he said.

"In taking these actions, the United States dramatically demonstrates to the remaining rogue states -- and particularly to Iran -- that our country takes note of positive changes in behavior and is more than willing to reciprocate."