Secretary of State Colin L. Powell held talks Thursday with Libyan Foreign Minister Abdel-Rahman Shalqam, in the first meeting between the countries' top diplomats in more than 25 years.

The high-level talks at the Waldorf-Astoria hotel come just four days after President Bush released more than $1.3 billion in frozen Libyan assets and provided a powerful symbol of Libya's political rehabilitation after being treated for years by most of the world as a pariah state. In response, Libya is expect to pay more money to each of the families of the victims of Pan Am Flight 103, which Libyan agents blew up in 1988 over Lockerbie, Scotland.

Relations between the United States and Libya have improved dramatically since Tripoli agreed in December to eliminate its chemical and biological weapons, permitting U.S. weapons experts to verify its compliance. But Powell told the Libyan diplomat that a "fair amount of work" in resolving questions about its past support of terrorism is required before the United States will remove Libya from the State Department list of countries that sponsor terrorism, a senior administration official said. Libya's removal from the list is a key step toward the resumption of full diplomatic relations.

Powell expressed "serious concern" about allegations of Libyan involvement in an assassination attempt against Saudi Arabia's Crown Prince Abdullah. He also said the United States would "continue to have concern about human rights in Libya," citing death sentences handed down to Bulgarian nurses accused of intentionally infecting Libyan children with the virus that can cause AIDS. U.S. and European diplomats maintain that the charges are unsubstantiated.

U.S. officials hope the steady improvement of relations with Libya will encourage other weapons proliferators, including Iran and North Korea, to end their weapons programs. But the policy has fueled intense emotional reaction among some of the relatives of the Pan Am victims, who believe that Libyan leader Moammar Gaddafi should be held accountable for killing Americans.

As part of a settlement ending U.N. sanctions on Libya, the Libyan government acknowledged responsibility for the terrorist attack and agreed to pay $2.7 billion to families of the 270 victims in the plane and on the ground. Each family is to receive a total of $10 million in three installments.