Libya's most significant acknowledgment was that it had a program intended to enrich uranium for use in nuclear weapons, a senior Bush administration official said.
And in London, CBS News Correspondent Mark Phillips reports a high-ranking government official said Gaddafi was close to developing nuclear weapons.
U.S. and British experts inspected components of a centrifuge program to enrich the uranium, though the system was not operational, the official said, briefing reporters at the White House on condition of anonymity.
The White House suggested that Libya's dramatic decision was influenced by the war in Iraq that toppled Saddam Hussein, as well as U.S. efforts to rein in weapons of mass destruction capabilities in North Korean and Iran.
Blair, speaking from Durham, Britain, and Bush, addressing reporters in the White House briefing room, described a process of nine months of secret talks and onsite inspections, initiated by the long reviled Libyan leader shortly after he agreed to a settlement in the 1988 bombing of a Pan Am jet over Lockerbie, Scotland.
In the decision announced Friday by all sides, Libya agreed to disclose all its weapons of mass destruction and related programs and to open the country to international weapons inspectors to oversee their elimination
"Colonel Gadhafi's commitment, once it is fulfilled, will make our country more safe and the world more peaceful," said Bush.
Recalling the war in Iraq, Bush said other nations should recognize that weapons of mass destruction "do not bring influence or prestige. They bring isolation and otherwise unwelcome consequences."
Bush said the United States and Britain, wary of Libyan promises, would watch closely to make sure Gadhafi keeps his word. And he said Libya's promises on weapons aren't enough; it must "fully engage in the war against terror" as well.
If Libya "takes these essential steps and demonstrates its seriousness," Bush held out the promise of helping Libya build "a more free and prosperous country."
The U.N. Security Council ended sanctions against Libya on Sept. 12 after Gadhafi's government took responsibility for the Pan Am bombing and agreed to pay $2.7 billion to the victims' families.
But the United States has kept its own 17-year embargo in place and has kept Libya on the list of nations that sponsor terrorism.
"As we have found with other nations, old hostilities do not need to go on forever," Bush said. "Libya can regain a secure and respected place among the nations and, over time, achieve far better relations with the United States."
The move represents a shift for a nation long regarded as an outlaw.
While Libya is credited with moderating its behavior in recent years, Gadhafi has been depicted as an erratic, untrustworthy ruler. In 1986, President Reagan sent American warplanes to bomb the Libyan cities of Tripoli and Benzghazi in retaliation for the bombing of a Berlin disco where a U.S. serviceman was killed.
The bombs struck Gadhafi's barracks and killed his young, adopted daughter and wounded two of his sons but Gadhafi, sleeping in a tent outside the compound, escaped injury.
Susan Cohen, a Cape May Courthouse, N.J., woman whose daughter was among the 270 people killed on Pan Am 103, said Friday night that Gadhafi cannot be counted on to keep his promise.
"How can we trust somebody who has blown up a plane?" she asked.
The Libyan news agency Jana Tripoli quoted Foreign Minister Abdel-Rahman Shalqam as saying Libyan experts had shown their U.S. and British counterparts "the substances, equipment and programs that could lead to production of internationally banned weapons."
Libya's decision is a "wise decision and a brave step that merit support from the Libyan people," Gadhafi said in a statement carried by the official news agency.
"The announcement by Libya to allow international weapons inspectors and to abandon its weapons of mass destruction programs clearly reflects the chilling impact of the arrest of Saddam Hussein, the invasion of Iraq and Libya's longstanding interest in having U.S. and U.N. sanctions removed," says CBS News Foreign Affairs Analyst Pamela Falk.
Teams of American and British experts went to Libya in October and December, the Bush administration official said.
They visited 10 sites related to Libya's nuclear program, the official said.
Libyan officials also showed the American and British team a significant amount of mustard agent, a World War I-era chemical weapon. Libya made the material more than a decade ago, and also had bombs that could be filled with the substance for use in combat, the official said.
Libya also acknowledged having chemicals that could be used to make nerve agent, the official said.
The U.S. official described little evidence of a Libyan biological program.
Libyan officials further acknowledged contacts with North Korea, a supplier of long-range ballistic missiles, and provided the U.S.-British team access to missile research and development facilities.
According to a recent, unclassified report to Congress, Libya's longest-range missiles were thought to be Scud-B ballistic missiles. These have a range of 186 miles. Libya agreed to destroy missiles with longer ranges, but it was unclear if the country had any.
Bush also used the announcement to try to nudge unnamed "regimes that seek or possess weapons of mass destruction" into similar cooperation.
"Those weapons do not bring influence or prestige; they bring isolation and otherwise unwelcome consequences," he said. "Leaders who abandon the pursuit of chemical, biological and nuclear weapons and the means to deliver them, will find an open path to better relations with the United States and other free nations."