US president George Bush has resumed oil imports and most commercial and financial activities to Libya as a reward for the country's abandoning of its weapons of mass destruction programme.
Libya's actions "have made our country and the world safer", the White House said. But some significant sanctions remain as an inducement to Libya to resolve issues still pending.
In an extraordinary move, Muammar Gaddafi agreed last December to dismantle Libya's biological, chemical and nuclear weapons programmes.
In response, the US lifted a ban on use of American passports to travel to Libya.
"Through its actions, Libya has set a standard that we hope other nations will emulate in rejecting weapons of mass destruction and in working constructively with international organisations to halt the proliferation of the world's most dangerous systems," White House press secretary Mr Scott McClellan said.
Last year, Libya removed a major obstacle to more normal relations with the United States by meeting US demands stemming from the bombing of Pan Am flight 103 in 1988 over Lockerbie.
Libya accepted responsibility for the bombing and promised to pay $6.5 million compensation to each family of the 270 victims.
