Dec. 24 (Bloomberg) -- The Bush administration is balking at Libya's request for more money to destroy 23 tons of mustard gas that the U.S. says are a tempting target for terrorists.

The U.S. estimates that the cost of building a destruction facility and rendering the materials harmless is about $65 million and has offered to contribute $45 million.

``Where it stands right now is we have a continuing offer on the table if the Libyans wish to reconsider it,'' said acting U.S. Deputy Assistant Secretary of State Donald Mahley, who has been involved in talks on the issue. ``From the Libyans' point of view, the main issue was cost,'' along with other contract terms, he said in an interview.

The failure to seal an agreement with Libyan leader Muammar Qaddafi, who President George W. Bush's aides have praised for renouncing terrorism and weapons of mass destruction, has drawn criticism from the Senate Foreign Relations Committee's top Republican.

``This was an opportunity that should have been seized with enthusiasm by the United States,'' Senator Richard Lugar of Indiana told the U.S.-Libya Business Association last month. ``I have communicated frequently with the Bush administration about this, and remain hopeful that the United States will play a constructive role.''

While Libya's mustard-gas stockpile is small compared with America's 14,000 tons of chemical agents and Russia's 30,000 tons, it's a concern to the U.S. ``Any chemical agent like that that is sitting out there in the world is a lucrative potential target for terrorists,'' said Mahley.

Weapons Treaty

Qaddafi ordered his troops in 1987 to use chemical agents against Chad, according to a 1996 U.S. Defense Department report. In 2004, Libya agreed to abide by the Chemical Weapons Convention, an international treaty that governs destruction of the arms. It has until 2010 to destroy its stockpile or face possible United Nations sanctions.

``The Libyan government has accepted from the outset that they are the possessors of this chemical agent, and the destruction of that chemical agent is their responsibility,'' Mahley said in the Dec. 14 interview.

Libya's agreement to abide by the treaty had been considered a victory for the U.S. campaign against weapons of mass destruction.

``Having Libya sign on was a big plus because they've actually been accused of using them and we were pretty sure they had them,'' said Michael Stebbins, head of the biological and chemical weapons program at the Washington-based Federation of American Scientists.

Libya Pulls Out

Libya pulled out of talks with the State Department on its chemical weapons in July because of the disagreements. Libyan officials have expressed disappointment with the slow pace of progress toward full relations with the U.S.

The impasse may be a symptom of the neglect that Libya has encountered since renouncing terrorism and its nuclear and chemical weapons in 2003, said Alex Bollfrass of the Washington- based Arms Control Association. While the U.S. lifted three decades of sanctions in 2006, diplomatic ties remain limited.

``The United States should do its best to reward Libya for its renunciation of its weapons of mass destruction,'' Bollfrass said in a Nov. 29 interview. ``There's a lot riding on this.''

Libya's other options include contracting with a European company to destroy its chemical agents, Bollfrass said.

Rice Visit

Libyan Deputy Foreign Minister Mohamed Taher Siala said in November that prospects for U.S. companies to win projects in a $185 billion development plan hinge partly on a visit by Secretary of State Condoleezza Rice. Libya holds Africa's largest oil reserves.

Rice and other U.S. officials cite the relationship with Libya as a model of how North Korea or Iran could restore their international reputations. In a Dec. 17 interview with a French television channel, Rice said Libya had made a ``strategic choice'' to shift course and improve ties.

The U.S. worked with Libya to dismantle the core of its nuclear weapons program, and the country has destroyed artillery used to fire shells filled with agents such as mustard gas.

Ali Aujali, Libya's envoy to Washington, declined to comment on the status of the destruction plans or the talks with the State Department.

Bollfrass said Aujali told the arms-control group's journal in September that the U.S. didn't fulfill promises of benefits in return for Libya's renunciation of terrorism and weapons of mass destruction.

Pressure on Bush

Bush is under pressure from Senator Frank Lautenberg, a New Jersey Democrat, and other lawmakers to keep Libya at arms length until Qaddafi pays full financial compensation for two terror attacks in the 1980s, including the bombing of a Pan Am airliner over Lockerbie, Scotland.

Rice said Dec. 21 that she anticipates a trip to Libya and cited a planned visit in January from Abdel Rahman Shalgham. The event will mark the first meeting in Washington since 1972 between a Libyan foreign minister and a secretary of state.

``The decision by Colonel Qaddafi to give up their weapons of mass destruction has benefited Libya'' in investment, trade and diplomatic ties, she said. Libya's position now is ``day and night from where it was before it made these strategic decisions.''

To contact the reporter on this story: Viola Gienger in Washington at vgienger@bloomberg.net.

Last Updated: December 23, 2007 17:12 EST