The Bush administration is finalising an agreement, clearing the way for Colonel Gaddafi's regime to settle outstanding court cases being taken in the US by the victims of Libyan-sponsored terror attacks.

Hundreds of millions of dollars would be paid to American citizens whose relatives died or who were injured.

But it appears the deal excludes non-US citizens, including IRA victims from Ulster (and bombings such as Enniskillen, the Shankill and Teebane) involved in a stateside civil action against Libya.

Reports in Washington DC said that the US Congress and the Bush administration are on the cusp of finalising a draft Bill to put to the House of Represent-atives.

It would propose removing all the final diplomatic sanctions on the Libyan administration and giving the North African country a future waiver from laws allowing victims to seize the US assets of the state sponsors of attacks.

In return, Gaddafi would settle compensation.

And, crucially, it would allow for full economic relations to re-open, so that US oil companies could negotiate contracts worth hundreds of billions of dollars to drill in Libya's plentiful oilfields.

Speaking from Washington last night, the director of south Armagh victims' group FAIR, William Frazer, said he was aghast at the development.

But he stressed that there was considerable opposition to the plan in the American political capital – especially from Democrat Senators, including Hillary Clinton – and the proposal would not get through without a major fight in both Congress and the Senate.

"If this was to happen it would be the dirtiest of deals by President Bush," said Mr Frazer.

"Northern Ireland and UK citizens have stood side-by-side with America on the war on terror and suffered more than most – and at the United States' request.

"In fact, it was as a direct result of Margaret Thatcher allowing US fighters to use British airforce bases to mount attacks on Libya in the mid-80s that Gaddafi turned to funding the IRA and reaping a killing spree of innocents in the Province.

"If this deal is done, it will bring shame on America and make a travesty of the war on terror."

Stormont Executive Junior Minister Jeffrey Donaldson, with responsibility for victims' issues, raised the Libya case with President Bush on his visit to Ulster last month.

The DUP man said: "If this is the case, that the American government has reached some sort of agreement with the Libyans, which falls short of what the American victims are looking for and excludes IRA victims here, clearly that is totally unacceptable."

Mr Donaldson also reminded America of its responsibility to the UK in relation to the war on terror, and the direct link between the attacks on Tripoli in the 1980s and Gaddafi backing the IRA in the Province.

He vowed that his party and First Minister Peter Robinson would be pursuing the matter – particularly on a visit to Washington, scheduled for September.

The outstanding civil actions relate to terror attacks, including the Berlin disco bombing of 1986, the downing of UTA Flight 172 from Congo to Paris in 1989 and the IRA victims' lawsuit.

But the Libya waiver deal – which comes out of discussions involving the US State Department, US Secretary of State Condoleezza Rice, Libya and US Congressional figures – only covers payments to American citizens.

The IRA case was filed in the American courts by US citizens impacted by IRA attacks.

Northern Ireland victims names were then added to the list of plaintiffs, with the potential for thousands more victims from the Province being added later.

One US news agency reported that the draft bill circulating on Capitol Hill could be introduced this week.