LONDON - Britain agreed to include Lockerbie bomber Abdel Basset al-Megrahi in a prisoner transfer deal with Libya because of overwhelming interests shortly before an oil deal was sealed with Tripoli, a newspaper reported on Sunday.

The Sunday Times said leaked letters from Justice Secretary Jack Straw undermined government denials of a link between the former Libyan agent's freedom and British trade interests.

Megrahi, 57, was released from jail on August 20 after Scottish authorities said his terminal cancer gave compassionate grounds for him to return home to die.

The British government has distanced itself from the decision, made by Scottish Justice Secretary Kenny MacAskill, which has angered many relatives of the bombing's victims and the United States government, which lost 189 citizens.

Megrahi was the only person convicted of the 1988 bombing of Pan Am flight 103 over the Scottish town of Lockerbie that killed 270 people. His rapturous reception in Tripoli has been criticized by the British and U.S. governments.

The Sunday Times said two letters from Straw, dated five months apart, showed he reversed an original plan to exclude Megrahi from a prisoner transfer agreement that was being discussed with Libya.

The paper said the change of heart appeared to be linked to a stalled $900 million oil and gas exploration deal with Libya for British oil giant BP that was ratified a few weeks later.

BP has always denied any link between the deal and the prisoner agreement.

Straw wrote to MacAskill in July 2007 to say he favored excluding Megrahi from the prisoner transfer, an arrangement desired by the Scottish administration which has autonomous powers over most criminal matters.

But by December 2007 he told MacAskill his position had changed.

The wider negotiations with the Libyans are reaching a critical stage and, in view of the overwhelming interests for the United Kingdom, I have agreed that in this instance the (prisoner transfer agreement) should be in the standard form and not mention any individual, the Sunday Times quoted Straw as writing.

Straw told BBC radio the alleged link between trade and Megrahi's release was an absurd confection.

The suggestion that at any stage there was some kind of backdoor deal done over Mr Megrahi's transfer because of trade is simply untrue, he said

The negotiations on prisoner transfers were part of a normalization process with Libya, he said.

London had made clear to Tripoli that Scotland would retain an absolute right to refuse a prisoner transfer, he added,

Straw said the issue was academic given that Scotland eventually released Megrahi on compassionate grounds and not under the transfer agreement.

(Reporting by Tim Castle; editing by Robin Pomeroy)

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