Russia has signed a deal with Libya to modernize around 200 of its Soviet-era and nearly obsolescent T-72 main battle tanks over the next few years.

The contract is part of negotiations underway since 2006 aimed to improve military cooperation between Russia and Libya, one of the largest customers of Russian military equipment in the past.

Those talks netted Russia a major arms contract last January -- a $1.8 billion deal for two batteries of powerful S-300 air-defense missiles, 12-15 Sukhoi Su-35 multirole fighters, four Su-30s and six Yakovlev Yak-130 combat training aircraft.

The package also includes several dozen T-90 main battle tanks.

Since the 1970s, Libya has bought from Russian more than 2,000 tanks, 2,000 armored infantry fighting vehicles and armored personnel carriers, about 450 self-propelled artillery pieces, as well as a number of combat aircraft and large quantities of small arms.

But by 2003 Russian sales to Tripoli had declined in the face of increasing competition from European arms manufacturers, thanks to improved relations between Libya and the West.

France has sold Libya missiles and other equipment and is pitching to sell Libya 14 Dassault Rafale multirole fighters as well as patrol ships and armored vehicles in a deal worth a total of around $5.8 billion.

U.N sanctions against Tripoli were largely lifted after Libyan leader Moammar Gadhafi stopped the country's national nuclear weapons program and accepted responsibility for the 1988 terrorist bombing of Pan Am Flight 103 over Lockerbie, Scotland, which left 270 dead, mostly Americans and including 11 townspeople.

Gadhafi also handed over a Libyan man, Abdelbaset al-Megrahi, to a Scottish court sitting in the Netherlands to be tried for the bombing. He was found guilty and sentence to life in prison in 2001.

In October 2008 Libya agreed to pay $1.5 billion compensation to the U.S. families of the Lockerbie bombing victims.

In return, U.S. President George W. Bush signed an executive order restoring the Libyan government's immunity from terror-related lawsuits and dismissing pending compensation cases in the United States.

Libya is also off the U.S. list of countries sponsoring terrorism, which has led to the possibility of greater western arms sales to the country.

However, Libya may yet fall back out of favor.

Megrahi was released in August last year by Scottish Justice Minister Kenny MacAskill because he was suffering terminal prostate cancer and was said to have around three months to live.

But Megrahi, who returned to cheering crowds in Tripoli, is still alive and subsequent reports have said his release had more to do with British company BP securing an oil deal in Libya than any humanitarian reasons.

A U.S. State Department representative said Secretary of State Hilary Clinton will be looking for clarification about possible connections between BP, oil contracts and Megrahi's release.

In a government documents obtained by the London-based newspaper The Guardian, officials of the U.K. Trade and Investment agency met a Libyan army officer to discuss "defense equipment cooperation" on Aug. 3, 2009 -- 17 days before the Megrahi was freed.

The newspaper also noted that BP signed a $900 million exploration agreement with Libya in May 2007, the same month that Britain and Libya signed a memorandum of understanding that paved the way for Megrahi's release, albeit two years later.