Rice to meet with Libyan leader Gadhafi

(CNN) -- U.S. Secretary of State Condoleezza Rice will make a historic visit to Libya next month, senior Bush administration officials said Tuesday.

Rice will meet with Libyan leader Moammar Gadhafi and other senior officials in a climate of improving relations between the United States and Libya, the officials said.

Her trip will be the highest level visit to Libya by a U.S. official in more than 30 years.

The long-anticipated trip was finally scheduled after a deal was struck this month between the United States and Libya in which Tripoli agreed to pay hundreds of millions of dollars to victims of terrorist attacks involving Americans. The agreement is to be followed by a U.S. upgrading of relations with Libya, including the confirmation of a U.S. ambassador and possible American aid, officials said.

If implemented, the deal would end Libya's legal liability in lawsuits from families of victims of what the United States considers Libyan terrorist acts. It also paves the way for stronger ties between the two nations and increased U.S. involvement in the oil-rich nation.

The deal hinges on congressional approval. Last month, just before leaving for summer recess, Congress unanimously adopted the Libyan Claims Resolution Act, sponsored by Sen. Frank Lautenberg, D-New Jersey. The legislation cleared the way to end the feud with Libya over terrorist attacks and created a fund for the victim payments.

The 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, killed 270 people, including 189 Americans. The 1986 La Belle disco bombing in Berlin, Germany, killed three -- including two U.S. servicemen -- and injured 229, 79 of them Americans.

Libya already has paid each of the 268 families involved in the Pan Am bombing $8 million of a $10 million settlement, but was withholding the remaining $2 million owed to each family over a dispute regarding U.S. obligations to Tripoli.

The pact, supported by the victims' families and their attorneys, closes the book on a contentious period in U.S.-Libyan relations. Ties between the two countries have improved since 2003 when Libya gave up its weapons of mass destruction program and began compensating the Lockerbie victims. But the lingering lawsuits have prevented the two countries from fully normalizing ties.

Earlier Tuesday while in Jerusalem, Rice spoke about new Israeli settlements on land claimed by Palestinians.

Rice restated her position that building Israeli houses on disputed lands "undermines confidence between the parties."

Her remarks came a day after Israel released nearly 200 Palestinian prisoners in an effort to reinvigorate the stalled peace effort.

"I've said it to my Israeli counterparts, that I don't think the settlement activity is helpful to the process," Rice said at a joint news conference with Israeli Foreign Minister Tzipi Livni. "That, in fact, what we need now are steps that enhance confidence between the parties."

Peace Now, an Israeli peace organization, released a report Tuesday that said Israel constructed nearly twice as many houses in the West Bank during the first six months of this year as it did in the same time period last year.

The activity comes after Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas agreed at a U.S-sponsored summit in November to work toward a comprehensive peace deal by the end of 2008. Although the two sides continue to hold negotiations, it is considered highly unlikely that such a deal will be reached within the next four months.

According to Peace Now, more than half of the housing units are being built outside the separation barrier, or security fence, that Israel is constructing in the West Bank.

Speaking on Tuesday, Livni disputed the Peace Now report, saying that to her knowledge, "settlement activities [have been] reduced in the most dramatic way, especially in parts which are on the other side of the fence."

"Israeli government policy is not to expand settlements, it's not to build new settlements, it's not to confiscate land from Palestinians," she said. "There [were] some small activities that are not going to influence neither the ability, nor the future border of the Palestinian state."

CNN's Elise Labott and Zain Verjee contributed to this report.

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