Britain offered to pay Colonel Muammar Gaddafi £14m in return for Libya ending its military support for the IRA, secret papers seen by The Independent have revealed.
The deal, worth £500m today, was part of a package of compensation measures to appease the Libyan leader and help open up trade with the North African state during the late 1970s.
Discovery of the secret offer, detailed in a letter sent by the then Prime Minister, Harold Wilson, raises fresh questions about whether Britain has ever paid Gaddafi compensation.
Jason McCue, the lawyer currently negotiating with the Libyans on behalf of victims of IRA bombings, said he was astonished that Britain was prepared to agree to such a pay off. "This all goes to support why our peace and reconciliation delegation is keen to meet and discuss matters in Tripoli. We believe that Anglo-Libyan relations should be flourishing but that certain human tragedies in the past have been overlooked and never reconciled."
Daniel Kawczynski MP, the chairman of the Libyan all-party group, accused the former Labour government of breaching the trust of the British people. "We should never entice other states away from terrorism by offering them taxpayers' money," said the Conservative MP for Shrewsbury.
The Foreign Office maintained it was not aware of the £14m offer to Col Gaddafi and the Ministry of Defence said there were no "live issues" regarding compensation for Libya.
The documents, transferred from the Foreign Office to the National Archives in Kew, include telegrams and secret policy documents setting out the terms of a settlement with Libya.
They include Wilson's "personal message" to Col Gaddafi from 1975, in which he makes clear that in return for ending material support for the IRA, Britain was prepared to give the Libyan leader money. Wilson wrote: "I do not want to anticipate the results of the forthcoming talks, which we shall enter into in a truly constructive spirit, but it might be helpful nevertheless to mention two questions of particular importance to us. The first of these concerns Northern Ireland."
The Prime Minister's message added: "Secondly, there is also, of course, a history of unsettled financial claims between Libya and Britain. I hope that these and any other bilateral matters can be speedily dealt with during the forthcoming talks between our officials and the way cleared for close and mutually beneficial relations between the United Kingdom and Libya."
Those "financial claims" related to cancelled contracts for Chieftain tanks and Bloodhound and Rapier missile systems that Libya had ordered from Britain. At the same time Britain had cross-claims against Libya for the expropriation of UK assets and interests when Col Gaddafi came to power via a coup in 1969. The Libyans later added compensation claims for death and injury caused by thousands of landmines left by the Eighth Army while fighting in North Africa during the Second World War.
Underpinning Britain's desire to reach a settlement with Col Gaddafi was the growing concern that Libyan-supplied explosives and weapons were being used to kill British civilians and soldiers. Fears over an Irish-Libyan link continued after James Callaghan succeeded Wilson as Prime Minister in April 1976.
In a telegram to the British embassy in Dublin on 16 September that year, the then Foreign Secretary, Tony Crosland, suggested that pressure be put on the Irish Government to end Col Gaddafi's continued interest in Northern Ireland. He wrote: "You should explain that our ambassador in Tripoli has tried for the past year to educate Qadhafi about the true nature of the Northern Ireland problem, but with little success. On several occasions in interviews and press statements Qadhafi has made disobliging remarks about Northern Ireland and the IRA which only testify to his ignorance of the problem." But Col Gaddafi rebuffed all diplomatic overtures to end support for the IRA, forcing the British government to draw up a memorandum agreement in which it set out the terms upon which the £14m would be paid.
In relation to Northern Ireland, the document stipulated "that the Libyan Government, acknowledging that the majority of people have freely chosen to remain part of United Kingdom, confirm they will not offer political, moral or material support for the IRA or other organisations committing or supporting violence in Northern Ireland".
By the end of 1976, with the £14m offer still on the table, British interest was dominated by a desire to capitalise on Libyan trade.
A Foreign Office memo reads: "The arguments for ending the dispute are, if anything, more powerful than ... in July 1975. Our share of the Libyan trade has fallen by half in the last five years, although it has remained steady over the past 12 months. Prospects of getting a share of the latest Libyan five-year plan, which has an investment budget of dinars 7bn are correspondingly poor."
But at the close of the decade, it was clear the policy of appeasement towards Col Gaddafi had failed. Libya had rejected the offer and was holding out for a more generous payment of £51m – £1.5bn today. Britain's ambassador in Tripoli, Donald Murray, wrote to London: "HMG made a genuine ex gratia offer in order to improve relations, even though they had no call to do so. It has been categorically rejected. There is still discrimination against our bilateral trade. Despite the discussion which Colonel Qadhafi had with HM ambassador in October 1975, there is no indication that the Libyan government wants to understand our problem on Ireland and we are now invited to interpret Libyan government policy from nothing more substantial than one remark which Colonel Qadhafi made to an American journalist."