Libya's Gaddafi speaks to Bush

WASHINGTON (Reuters) - In a further sign of warming ties, U.S. President George W. Bush called Libyan leader Col. Muammar Gaddafi on Monday to voice satisfaction at a U.S.-Libya deal to compensate victims of terrorism, the White House said.

A senior official said there were no records of any previous U.S. president speaking to Gaddafi, who seized power in a 1969 military coup. Rights groups say Gaddafi's reign has been marked by human rights abuses and restrictions on freedom of expression.

U.S. Secretary of State Condoleezza Rice plans to meet one of Gaddafi's son's, Saif al-Islam, at the State Department this week, most likely on Tuesday, the State Department official told reporters.

Saif is seen as influential in Libya and played a key role negotiating the country's emergence from diplomatic isolation. He also is viewed by many as a leading advocate of change in Libya.

The United States has long treated Libya as a pariah, blaming it for violence including the 1988 bombing of a Pan Am jet over Lockerbie, Scotland, that killed 270 people and the 1986 bombing of a German disco that killed two U.S. citizens.

However, there has been a dramatic rapprochement between the two nations in the past five years since Libya decided to give up its weapons of mass destruction programs following the March 2003 U.S. invasion of Iraq.

The Bush administration's central justification for the Iraq war was the belief that former Iraqi dictator Saddam Hussein had weapons of mass destruction and could transfer them to militants. No such weapons were found after the invasion.

Under the U.S.-Libya compensation agreement, a $1.8 billion fund was created to compensate victims of terrorism, including the Lockerbie bombing. The State Department on October 31 said Libya had paid $1.5 billion into the fund, removing what U.S. officials said was the last major obstacle to normal ties.

About $300 million from non-U.S. government sources was placed into a fund to compensate Libyan victims of violence.

"The president called Libyan leader Colonel Gaddafi to express his satisfaction that the claims settlement agreement was fully implemented on October 31," said National Security Council spokesman Gordon Johndroe. "The two leaders discussed that this agreement should help to bring a painful chapter in the history between our two countries closer to closure."

"The United States will continue to work on the bilateral relationship with Libya, with the aim of establishing a dialogue that encompasses all subjects, including human rights, reform, and the fight against terrorism," he added.

(Reporting by Tabassum Zakaria and Arshad Mohammed; Editing by Bill Trott)