WASHINGTON (Reuters) -- The United States restored diplomatic ties with Libya almost two years ago, but U.S. legislation last month to compensate terrorism victims has soured relations and stalled business between the former foes.

U.S. officials and companies seeking to trade with Libya, as well as Libya's ambassador to Washington, said ties were increasingly strained and Tripoli felt it was not being rewarded for giving up its weapons of mass destruction program in 2003.
""This legislation has damaged a lot -- our new relations -- unfortunately. It is a great setback,"" Libya's ambassador to the United States, Ali Aujali, told Reuters.
""Libya is not getting what we deserve,"" he added.
Libyan Foreign Minister Mohammed Abdel-Rahman Shalgam, who visited Washington last month, sent a letter to U.S. Secretary of State Condoleezza Rice asking her to try to ""correct"" the latest legislation.
Asked about the strains, Rice told reporters on Friday that she wanted to improve ties but conceded there were differences with the former pariah state and she was concerned about the families of victims of terrorism.
""We are on a completely different footing with Libya. We want to press relations forward and to move them forward,"" she said, adding that the State Department was looking at the effect of the new legislation and what could be done.
Democratic Sen. Frank Lautenberg of New Jersey attached the new legislation to an Iraq war funding bill, expanding existing laws to enable terrorism victims to collect damages from governments such as Libya by having their assets frozen.
The assets freeze has jangled the nerves of U.S. firms wanting to invest in Libya after sanctions were dropped against Tripoli and Rice announced to much fanfare in May 2006 that diplomatic relations would be restored.
""Obviously when you have a major strategic shift of the kind that Libya has made, you want there to be some affirmation of the importance of having done that,"" said Rice.
Rice said last year she hoped very soon to visit Libya, affirming the new relationship, but the compensation cases and human rights concerns have prevented such a trip. She said on Friday she would still like to go but gave no date.
Pending legal issues include cases involving the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, and the 1986 bombing of a German disco. Americans died in both cases.
In addition, a U.S. judge last month ordered Libya to pay billions of dollars in damages to relatives of Americans killed in a 1989 suitcase bombing of a French airliner over Niger.
Compounding problems is a hold-up in Congress for confirmation hearings for Gene Cretz, a new U.S. ambassador to Libya proposed by the administration in July last year.
Diplomats said Rice recently pressed Democratic Sen. Joseph Biden, head of the Senate Foreign Relations Committee, to schedule a hearing but was told not to expect one soon.
There is also a delay in money for a U.S. embassy in Tripoli after Lautenberg won approval to strip $110 million in funding until the terrorism cases are settled.
""Libya has, after all, withdrawn from the business of terrorism and given up its weapons of mass destruction program at a time when other countries in the region are pursuing both. We want to set the right example here,"" said a senior U.S. official, who spoke on condition he not be identified.
U.S. companies investing in Libya are also worried. Janet Grothe, a spokeswoman for ConocoPhillips, said the oil firm feared the Lautenberg law could jeopardize current and future projects. She said the company was working to persuade Congress to revise the law.
David Goldwyn of the U.S.-Libya Business Association said there were major litigation risks as U.S. companies could be called on to defend in court the ownership of their assets. It also meant Libya would not invest in the United States.
Lautenberg, however, said the law provided justice for victims ""who have suffered at the hands of terrorist states.""
""This legislation will allow victims of state-sponsored terror to have their day in court,"" Lautenberg told Reuters.