NEW YORK (Reuters) - President Bush on Monday formally ended the U.S. trade embargo on Libya to reward it for giving up weapons of mass destruction but left in place some U.S. terrorism-related sanctions.

The president's action is partly symbolic because it simply makes permanent his April decision to suspend most commercial sanctions and allow U.S. firms to invest in Libya and buy its oil for the first time since 1986.

But the moves, which take effect on Tuesday, will also end remaining restrictions on U.S.-Libyan aviation and the State Department said they will unblock about $1.3 billion in frozen Libyan and other assets -- steps Bush did not take in April.

The decision to scrap the sanctions outright showed Bush's confidence that Libya had kept its Dec. 19 promise to give up nuclear, chemical and biological arms and that verification procedures were in place to ensure it stayed that way.

"Libya has worked with international organizations and the United States and United Kingdom to eliminate its WMD and longer-range missile programs in a transparent and verifiable manner," White House spokesman Scott McClellan said in a statement. "Libya's efforts open the path to better relations with the United States and other free nations."

Bush's decision was also expected to trigger the release of an additional $4 million in Libyan compensation to families of each of the 270 people killed when Pan Am Flight 103 blew up over Lockerbie, Scotland in 1988, killing everyone on board.

ORDERS REVOKED

Bush formally revoked the four underlying executive orders that had barred most trade with Libya, restricted U.S.-Libyan aviation, froze Libyan government assets in the United States and prevented the importation of Libyan oil.

U.S. oil companies have beaten a path to Libya's door since Bush suspended most commercial sanctions on April 23.

One airline, Texas-based Continental Airlines Inc., applied on Monday for permission to provide air service to Tripoli by selling tickets under its name on Dutch airline KLM, a part of Air France-KLM that would fly the flights.

Bush scrapped a trade embargo imposed in 1986 when former U.S. President Ronald Reagan declared a "national emergency" to deal with the threat posed by a series of what Washington regarded as Libyan-sponsored terrorist actions.

 Bush did not, however, act to drop Libya from the State Department's list of state sponsors of terrorism.

Libya's presence on the list bars it from receiving U.S. arms exports, controls sales of items with military and civilian applications, limits U.S. aid and requires Washington to vote against loans from international financial institutions.

The United States has long accused Libya of terrorism and recent allegations that Libyan leader Muammar Gaddafi ordered the assassination of Saudi Arabia's Crown Prince Abdullah have made Washington loath to drop these sanctions any time soon.

There has been a dramatic improvement in U.S.-Libyan relations since Libya last year took responsibility for the Lockerbie bombing and turned over $2.7 billion, or $10 million per victim, as part of a phased compensation agreement.

The families got $4 million last year after the U.N. ended its sanctions on Libya. They are due to get another $4 million now that U.S. commercial sanctions are lifted and $2 million more if Washington drops Tripoli from the state sponsors list. (Additional reporting by Adam Entous and Tim Dobbyn in Washington)

© Reuters 2004. All Rights Reserved.

Commentary:
In Bush's world we can trust Muammar Gaddafi, who is a known terrorist, but we couldn't trust Saddam, someone who wasn't a terrorist.

Or more precisely the US supported Saddam in the 1980's and early 1990's when he was a tyrant, but when it became politically expedient, we went to war with him (twice, no less).

When will the US stop supporting known despots and tyrants? I think only when we stop electing republican presidents.

The next president will have a lot of things to clean up.