Libya has paid $1.5 billion into a fund for victims of terrorism, the US State Department said, a step that will remove a major obstacle to improving US-Libyan ties.

"The (Bush) administration will now move expeditiously to arrange for distribution of these funds," a statement by State Department spokesman Sean McCormack said.

The fund was agreed in August by the United States and Libya to settle terrorism claims on both sides from the 1980s.

American victims covered by the fund include those who died in the 1988 bombing of Pan Am flight 103 over Lockerbie, Scotland, which killed 270 people, and the 1986 attack on a West Berlin disco that killed three people and wounded 229.

Settling the issue of terrorism claims is a key factor in improving ties between the two former foes, which first began warming after Libya gave up its weapons of mass destruction program in 2003.

"Libya's decision to resolve outstanding claims through the US-Libya Claims Settlement Agreement is a laudable milestone in our bilateral relationship; providing a measure of justice to families of US victims of terrorism and clearing the way for continued and expanding US-Libyan partnership," McCormack said.

"Indeed, Libya's return to the international community following its historic 2003 decision to renounce terrorism and dismantle its WMD (weapons of mass destruction) program has been remarkable," he said, adding that Libya was now an "important partner in the common effort against terrorism" and a model for other countries.

Of the $1.8 billion expected ultimately to go into the joint fund, about $1.5 billion is earmarked for US victims' families and the remainder for Libyans killed in 1986 when U.S. planes bombed Tripoli and Benghazi in retaliation for the disco attack.

Libya made a substantial payment earlier this month, but US.officials said then that they could not start making payments until they had received the remaining agreed amount.