A LAWYER representing relatives of victims of the Lockerbie bombing last night expressed optimism that they would receive a final compensation payment, despite a row between the US and Libyan governments which threatens the settlement.

The hopes expressed by Peter Watson, a Glasgow solicitor-advocate, followed news that the Libyan Central Bank had withdrawn a payment of pounds-277m intended for relatives of 270 people killed in the bombing of PanAm Flight 103 in December 1988.

No reason was given for the withdrawal of the money, intended as a final instalment of pounds-1.1m per family.

Libya, which has acknowledged responsibility for the bombing, is understood to have already paid each family pounds-4.4m in compensation after the US and the United Nations agreed to lift sanctions.

The US State Department, however, has not removed Libya from its list of states that sponsor terrorism - the condition Libya set for the final payment. The State Department has refused to comment.

In September, George W Bush signed an order removing a ban on commercial air services to Libya and released pounds-720m in Libyan assets in recognition of steps it had taken to eliminate its programme for weapons of mass destruction. The move was seen as the trigger for the release of more than pounds-560m in compensation to relatives of victims of the bombing.

Under the terms of a compensation deal involving the US, British and Libyan governments, each victim's family was to receive pounds-7m - 40-per cent to be paid when UN sanctions were lifted, and a further 40-per cent once US sanctions were ended.

The final 20-per cent was to have been paid when Libya was removed from the State Department's list of countries that sponsor international terrorism.

Before the weekend, Libya had paid 80-per cent of the agreed compensation. The final 20-per cent (pounds-277m), which was held in the Bank of International Settlements in Geneva, was due to have been paid at the end of February.

However, Mr Watson explained last night: "In terms of the agreement that was reached, the money was due to go back to Libya in the absence of all of the requirements of the agreement being satisfied.

"The US, for the moment, has not removed Libya from the list of states that sponsor terrorism.

"As a result, the final part of the payment has not been paid.

The parties involved continue to meet and hope that a mechanism will be found to complete the payment and reach a settlement."

Jim Swire, a spokesman for the UK Families Flight 103 Group, said: "Libya appears to have stuck to its part of the agreement. We need an answer from the US as to why Libya's name remains on its list of countries that sponsor international terrorism."

A spokeswoman for the Foreign Office said: "The UK families remain a priority. We hope the compensation paid allows the families some comfort on Lockerbie, although we recognise they remain committed to finding the truth about the bombing."

Abdelbaset Ali Mohmed al Megrahi was told in November 2003 he must serve at least 27 years in prison after being found guilty of the bombing.