The White House announcement lifted travel curbs that have been in place for 23 years against Libya, a country which the United States had long branded a sponsor of state terrorism.
Allowing U.S. travel to Libya would give American corporations an opportunity to do lucrative business legally in Libya's rich oil fields. It also would help Gadhafi emerge from semi-isolation.
The lifting of the travel ban came after the Jamahiriya news agency disavowed assertions by the Libyan prime minister that Libya had not acknowledged it blew the jetliner out of the skies over Lockerbie, Scotland in 1988, killing 270 people, including 181 Americans.
The statement, which appeared at midday on Libya's web site, said Libya had helped bring two suspects to justice "and accepts responsibility for the actions of its officials."
The United States has been moving toward improved relations with Tripoli since Gadhafi renounced the development of weapons of mass destruction and allowed weapons inspectors to verify that his country was abandoning nuclear, chemical and biological programs.
The administration already has decided to send a U.S. diplomat to Tripoli after a quarter-century of icy distance. More will be added, U.S. officials said. The Americans, working out of a so-called "interest section" will explore renewing formal ties with Libya as well as helping U.S. travelers.
There are now 10 to 15 U.S. and British experts in the country to oversee the dismantling of Libya's nuclear weapons program.
The U.S. effort to ease some sanctions with Libya is meant partly to reward Gadhafi. It also is aimed at encouraging other countries with serious weapons programs to give them up and reap the benefits of trade with the United States.
Secretary of State Colin Powell already has signed documents to rescind restrictions on the use of American passports for travel to Libya, National Security Council spokesman Sean McCormack said. Powell was expected to discuss the action during congressional testimony on Thursday.
The lifting of the travel ban was one of several steps being taken, McCormack said. He said other actions would be announced later.
McCormack said Libya's retraction had clarified that its statement last August, accepting responsibility for the bombing, still stands.
"In recognition of Libya's concrete steps to repudiate (weapons of mass destruction) and to build the foundation for Libya's economic growth and reintegration with the international community, the United States will take steps to encourage Libya to continue on this path including rescinding restrictions on the use of American passports for travel to Libya as well as other steps," he said.
In Cherry Hill, N.J., CBS News Correspondent Peter Maer reports the president of the Victims of Pan Am 103 Association, Cara Weipz, remains skeptical about Libya's intentions. Her brother Rick was among the 270 victims of the 1988 terror attack.
"They may have changed their spots but they still have spots," Weipz said. "I don't know what to believe."
She compared the decision on Libya to paroling a criminal.
"If someone hurt someone you loved and was put in jail and then paroled, where the community might welcome them back, you would not," she said. "I don't think that's unreasonable to say.
"These people were responsible for murdering my brother."