Jack Straw decided two years ago that it was in the UK's "overwhelming interests" not to exclude the Lockerbie bomber from a prisoner transfer agreement with Libya, it emerged.
Leaked letters from the Justice Secretary appeared to show that he backed away from efforts to stipulate that Abdelbaset Ali Mohmed al-Megrahi was exempt from the agreement, citing "wider negotiations" with the Libyans.
Mr Straw's stance was set out in letters to Kenny MacAskill, the Scottish justice secretary who recently provoked anger by releasing Megrahi on compassionate grounds.
The bomber was not released as part of the prisoner transfer agreement.
But the disclosure of Mr Straw's letters, by The Sunday Times, is likely to raise questions about the Government's position on Megrahi's return to Libya earlier this month.
Ministers have rejected suggestions that the release was linked to Britain's commercial interests but have refused to state whether they agree with Mr MacAskill's decision.
The Sunday Times reported that Mr Straw's apparent change of stance came at a crucial time in negotiations about an oil exploration contract for BP in Libya. Six weeks after his change of heart, the deal was ratified.
In one of the letters, Mr Straw wrote: "I had previously accepted the importance of the al-Megrahi issue to Scotland and said I would try to get an exclusion for him on the face of the agreement.
"I have not been able to secure an explicit exclusion.
"The wider negotiations are reaching a critical stage and, in view of the overwhelming interests of the United Kingdom, I have agreed that in this instance the (prisoner transfer agreement) should be in the standard form and not mention any individual."
Liberal Democrat foreign affairs spokesman Ed Davey said the letters were the strongest evidence yet that the Government had been talking to the Libyans about Megrahi with a view to safeguarding Britain's commercial interests.
But Mr Straw said last night that the proposed exclusion of Megrahi from the prisoner transfer scheme had been dropped because it "went beyond the standard form".
He also stressed that the Scottish Executive always retained a veto over the release.
In a statement, Mr Straw said: "The negotiations over a prisoner transfer agreement (PTA) were part of a wider agreement for the normalisation of relations with Libya as part of bringing them into the international community.
"It was always made clear to the Libyans that, as with all other such agreements, the sentencing jurisdiction - in this case Scotland - had a right to veto any individual application including that of any application from Mr Megrahi.
"Notwithstanding Ministers' right of veto, the Scottish Executive wanted a specific carve out from the PTA treaty in respect of Mr Megrahi.
"I gave instructions to British negotiators to try to secure this.
"However, such an exclusion went beyond the standard form of PTA treaties and in the event an agreement for a PTA in the standard form - including the rights of veto of any application - was agreed.
"All this, however, is academic as Mr Megrahi was not released under the PTA treaty but quite separately by the Scottish Executive on compassionate grounds.
"The Scottish Executive also refused his PTA application. This process was made clear at every stage to Libyan negotiators."
The latest twist in the row surrounding Megrahi's release came as he himself backed calls for a public inquiry into the atrocity.
Megrahi said it was "unfair" to the victims' families not to have an inquiry into the bombing.
Megrahi, 57, speaking from a bed in his home in Tripoli, Libya, told The Herald newspaper: "I support the issue of a public inquiry if it can be agreed.
"In my view, it is unfair to the victim's families that this has not been heard. It would help them to know the truth. The truth never dies. If the UK guaranteed it, I would be very supportive."
Dr Jim Swire, whose 23-year-old daughter Flora died in the disaster, has frequently called for a full public inquiry.
Megrahi added: "I would want to help Dr Swire and the others with the documents I hold.
"My feeling is that the UK Government will avoid a public inquiry because it would be a headache for them and the Americans and it would show how much the Americans have been involved and it would also cost them a lot of money which they may not want to spend because of the recession."
Last week Megrahi, who has terminal prostate cancer, was allowed to leave Greenock prison to go home to Libya die.
The man who was convicted of murdering 270 people in the December 1988 bombing of Pan Am 103, returned to a hero's welcome. He had served just eight years of a minimum 27 year sentence.
The scenes provoked international condemnation.
Frank Duggan, president of the family group Victims of Pan Am Flight 103 Inc, described the disclosures as "shocking".
He told BBC Radio 5 Live: "If there was a direct connection with trade, particularly oil, then the connection is with Britain not with Scotland, and I think the Brits will have something to answer for."Reuse content