Justice Secretary Jack Straw said trade, particularly a deal for oil company BP PLC, was "a very big part" of the 2007 negotiations that led to the prisoner deal. The agreement was part of a wider warming of relations between London and Tripoli.
"Libya was a rogue state," Straw was quoted as saying by The Daily Telegraph newspaper. "We wanted to bring it back into the fold and trade is an essential part of it
- and subsequently there was the BP deal."
The British government has faced intense criticism over the release of Abdel Baset al-Megrahi, a Libyan convicted in the 1988 bombing of a Pan Am airliner over Lockerbie, Scotland. The attack killed 259 people aboard the plane, most of them American, and 11 on the ground.
Last month Scottish officials freed al-Megrahi, 57, on compassionate grounds because he is dying of prostate cancer.
Although he was not released under the prisoner transfer agreement, opposition politicians, and many victims' families, claim business considerations influenced the decision to free him.
On Wednesday, Prime Minister Gordon Brown insisted there was "no conspiracy, no cover up, no double dealing, no deal on oil" over the bomber's release.
But officials admit the prisoner transfer agreement was part of a wider set of negotiations aimed at bringing Libya in from the international cold, and improving British trade prospects with the oil-rich nation.
David Lidington, foreign affairs spokesman for the main opposition Conservatives, said it was "very hard to square what Jack Straw says today with Gordon Brown's repeated denials of any kind of deal."
"That's why we need an independent inquiry to get to the truth."
