The British government was brokering a secret deal worth up to €12bn with Colonel Muammar Gaddafi's regime before Libya descended into chaos.
For the past 18 months a British Foreign Office unit has been supporting lawyers fighting to win compensation for UK victims of IRA bombs built with Libyan-supplied explosives. The team was in the advanced stages of discussing a "victims' initiative" package with key members of Col Gaddafi's regime.
The possible agreement would have included payouts for families of those killed and injured who are bringing the claim, as well as a huge "cultural and social" investment focusing on reconciliation projects, many in Northern Ireland.
Insiders said that since Britain's coalition came to power last May, government efforts to secure a deal had been stepped up, with David Cameron, the prime minister, and William Hague, the foreign secretary, taking a personal interest in the talks. Sources said that the agreement would have seen Libya committing between £2bn and £10bn (€12bn) the UK, as part of an effort to detoxify "Brand Libya".
It is thought up to £1bn might have been shared between the 150 claimants. The claimants include victims injured by IRA bombs constructed using Semtex supplied by Libya, and relatives of those killed in the blasts.
The rest of the money would have been spent supporting other victims of the IRA's Libyan Semtex bombs who have not been involved in the legal action, as well as for implementing wider educational and medical schemes to help all of the communities affected by the Troubles.
These could include setting up a £20m (€24m) project to provide professional help for victims of bomb attacks, or funding a new university in Northern Ireland with an African studies department. One insider said that if the deal had gone ahead it could have "helped to cement a lasting peace in Northern Ireland".
Although some campaigners have expressed fears any agreement may now be in jeopardy because of the turmoil in the country, others have said they believe any new regime will continue the talks in a bid to rebuild the country's reputation. Jason McCue, the human rights lawyer who heads up the victims' initiative, described the potential compensation deal as "extremely innovative".
"The whole idea was to create a proper and solid foreign relationship with Libya that benefited victims, the people of Northern Ireland and the UK and indeed the people of Libya.
"There is no question that numerous meetings with members of the Gaddafi regime were absolutely pointless. But actually what we have learned from the experience and the Libyan people will enable us to fast-track the initiative with any new Libyan government."
He added that Col Gaddafi himself may have been the key obstacle to the deal, leaving hope that if he is replaced a deal could still be reached.
Mr McCue has spent the past 10 years acting for the victims of IRA bombings at Harrods in 1983, Enniskillen in 1987, Manchester in 1996, and London's Docklands, also in 1996. All of the attacks used Semtex, the Czech-invented high explosive provided to the IRA by Col Gaddafi.
The links between Libya and the IRA became public knowledge in 1973 when the Irish Naval Service boarded a ship off the Irish coast and found five tonnes of weaponry supplied by the Libyan government. Three other shipments are thought to have got through, and Tripoli continued to supply the IRA. A major shipment was partially intercepted in 1978 in the wake of the United States' bombing of Libya the previous year.
As Libya attempted to rehabilitate its international reputation in the past decade, it had paid compensation to victims of its own international terrorism campaign. In 2008 the former US President George W Bush brokered a $1.5bn (€1.09bn) deal, which provided payouts for American victims of the Lockerbie attack. At the time the British victims were also pursuing their claim through the American courts, but the agreement halted that action.
In 2009, after initially refusing to intervene for fear of jeopardising trade negotiations with Libya, Gordon Brown, then prime minister, pledged dedicated Foreign Office support for the UK case.
Mr McCue added: "We put a proposal on the table at the early stages. While some of the Libyans we dealt with in and out of government were courteous, respectful and keen, we hit difficulties with the Gaddafi regime who at times were dismissive and frustrating.
"All this time our whole team were acutely aware of the pain the delay must have been causing the victims."