Abdel Baset al-Megrahi's presence at Tuesday's rally appeared to be another sign of defiance by the embattled regime of Muammar Qaddafi, locked in a civil war with anti-government rebels for the past five months.
Britain officially recognized Libya's main opposition group as the country's legitimate government and expelled all diplomats from Qaddafi's regime on Wednesday.
Al-Megrahi was convicted in the 1988 downing of a Pan Am plane that killed 270 people, most of them Americans, over Lockerbie, Scotland. He was released from a Scottish prison in 2009 after being diagnosed with prostate cancer, and at the time was given three months to live. Al-Megrahi returned to a hero's welcome in Libya later that year.
"The appearance of Mr. al-Megrahi on our television screens is a further reminder that a great mistake was made when he was released," British Foreign Secretary William Hague told reporters Wednesday.
Medical advice suggesting that al-Megrahi had only three months to live "was pretty much worthless," Hague said.
Hague's Conservative Party opposed the Scottish government's decision to free al-Megrahi on compassionate grounds and has criticized the Labour government, which it replaced last year, for paving the way for his release.
"The anger and outrage at this release will be intensified by what we have seen," Hague said.
The Libyan state TV footage, rebroadcast in Britain and elsewhere, shows al-Megrahi sitting in a wheelchair, wearing a white turban and what appears to be a blue medical mask tucked under his chin. He looks thin, but attentive and is flanked by men in traditional Libyan tribal dress.
Qaddafi has rejected calls by the international community to step down. Instead, he has threatened to attack targets in Europe unless NATO stops its bombing campaign of regime-linked installations in Libya. NATO is acting under a U.N. mandate to protect civilians.
In formally recognizing Libya's main opposition group, the National Transitional Council, as the "sole governmental authority in Libya," Hague said Britain is unfreezing 91 million pounds ($150 million) of Libyan oil assets.
Hague said the council has been invited to send an ambassador to London, adding that "we will deal with the National Transitional Council on the same basis as other governments around the world."
In the eastern Libyan city of Benghazi, the main rebel stronghold, rebel chief Mustafa Abdul-Jalil praised the British decision as an economic and political boost.
Abdul-Jalil also said rebel forces will keep fighting during the Muslim fasting month of Ramadan, a time of heightened religious observance that begins next week.
"Fighting during Ramadan is not something we want to do," Abdul-Jalil told a news conference. "But if Qaddafi does not step down, we will fight, and you must know that this month will keep up our morale."
Abdul-Jalil reiterated that a proposal to let Qaddafi retire in Libya, provided he resigns, is no longer on the table. The rebel chief said proposal was linked to a deadline by which Qaddafi would have had to step down. That deadline has passed, "and that makes the proposal no longer valid," Abdul-Jalil said.
Over the past week, officials in the U.S., France and Britain have said they would not object to such an arrangement, provided it's accepted by the Libyan people.
Letting Qaddafi retire in Libya might have been a possible way out of the military and political deadlock of the past few months. The civil war broke out shortly after anti-government protests, inspired by uprisings elsewhere in the Arab world, swept across Libya in February.
Rebels now control the east of the country and pockets in the west, while Qaddafi clings to power in the remaining areas.