After years of condemning Libya as a rogue state, the Clinton administration has recently taken steps toward better relations with the government of Moammar Gadhafi, citing evidence of growing moderation on the part of a leader long demonized as a patron of international terror.

Since Gadhafi last April agreed to the extradition of two men suspected of blowing up a Pan Am jetliner over Lockerbie, Scotland, in 1988, the administration has permitted four U.S. oil companies to visit Libya on reconnaissance missions and, last month, publicly welcomed the expulsion from Libya of the infamous Abu Nidal terrorist group.

Although unilateral U.S. sanctions still bar most trade between American companies and Libya, the administration last spring approved the de facto lifting of international U.N. sanctions against the oil-rich North African country and--according to a senior official--is considering whether to lift a passport restriction that bars U.S. citizens from traveling to Libya without a special State Department exemption.

The senior official, who spoke on condition of anonymity, emphasized that the administration has no intention of normalizing relations with Tripoli until Gadhafi takes further steps, such as cooperating with the trial of the two Lockerbie suspects and paying compensation to relatives of those who died in the attack.

"Gadhafi needs to see that this is in his interest, that it's worthwhile to cooperate," the official said. "If you only want to punish him, he has no incentive to get out of the terrorism business, cooperate with the trial or do anything else."

The administration's overtures to Gadhafi have angered some relatives of the victims of the Lockerbie bombing, which killed all 259 people aboard the plane and another 11 on the ground. They are particularly incensed by reports that a letter written to Gadhafi last February by U.N. Secretary General Kofi Annan--and approved by U.S. and British officials--contained a pledge that the trial of the Lockerbie suspects would not be used to "undermine" the Libyan regime.

After reading portions of the letter to several relatives of Lockerbie victims, administration officials declared it classified and have since declined to share its contents with lawmakers. Yesterday, for the third time since September, Rep. Benjamin A. Gilman (R-N.Y.), chairman of the House International Relations Committee, requested a copy of the document in a letter to Secretary of State Madeleine K. Albright.

"The point is that Gadhafi is being protected," said Susan Cohen of Cape May, N.J., whose 20-year-old daughter, Theodora, was one of 35 Syracuse University students who were returning home on Pan Am Flight 103 when it exploded on Dec. 21, 1988. "It doesn't matter what happens. The United States has struck a deal."

The senior official said that without some assurances that the United States did not seek the overthrow of his regime, Gadhafi never would have surrendered the suspects, adding that prosecutors could still "follow the evidence wherever it leads."

Libya under Gadhafi's erratic leadership has long been regarded in Washington as one of the prime sponsors of international terrorism. On April 14, 1986, U.S. warplanes struck Libyan military targets in Tripoli and Benghazi after intelligence reports linked Gadhafi's regime to the bombing of a West Berlin nightclub nine days earlier that killed an off-duty U.S. serviceman.

But the tone of Washington's diplomacy toward Libya has changed since Gadhafi's decision to hand over the two suspects, former agents of the Libyan security services. Abdel Basset Ali Megrahi, 47, and Amin Khalifah Fhimah, 43, will be tried by Scottish judges and prosecutors in the Netherlands under the compromise that led to the suspects' extradition and the subsequent lifting of U.N. sanctions against Libya.

In a Nov. 30 speech that was cleared in advance with top administration officials, Ronald E. Neumann, deputy assistant secretary of state for Near East affairs, said the extradition of the Lockerbie suspects had "prompted questions about whether Libya has changed fundamentally."

Neumann went on to note "positive steps" taken by the Libyan regime, including--since April--the closing of training camps used by the Abu Nidal Organization, which has been linked to terrorist attacks that have killed or injured 900 people in 20 countries.

"As far as we can tell, the Libyan government's actions are not window-dressing, but a serious, credible step to reduce its involvement with that terrorist organization," said Neumann, who also noted that Gadhafi has indicated a willingness to support the U.S.-sponsored Middle East peace process.

Appearing on CBS's "Early Show" on Tuesday, the 11th anniversary of the Lockerbie bombing, Gadhafi said "America is right to expect hostile actions against it," but added, "I hope it will not happen."

The administration has indicated its willingness to reward Gadhafi for good behavior, approving, for example, a request last summer by four U.S. oil companies--Conoco, Occidental, Amerada Hess and Marathon--to check on the condition of oil fields and equipment they abandoned more than a decade ago.

White House and State Department officials also sought to cut Libya some slack on the question of U.N. sanctions, according to a former administration official who was involved in the Lockerbie issue. As stipulated by an agreement between Libya and the United Nations, the arrival of the suspects in the Netherlands on April 5 triggered an automatic suspension of the U.N. embargo.

To some in the administration, as well as some Lockerbie relatives, the use of the word suspension meant that if Gadhafi did not cooperate with the trial, the sanctions would be automatically reimposed. But according to the former official, White House and State Department officials ultimately agreed with the British that any reimposition of the sanctions would require an affirmative Security Council vote--a condition that virtually ensures the suspension will be permanent.

A senior administration official involved in the deliberations described that account as "totally bogus" but added that "for all practical purposes the sanctions are gone . . . except for a symbol."