TRIPOLI, March 25: Britain's Tony Blair sealed Libya's return to the international fold on Thursday with an historic handshake for Muammar Qadhafi and an agreement to fight Al Qaeda together.

After more than an hour of talks, the prime minister said Libya's rejection of banned weapons and rapprochement with the West could act as a template for other Arab nations to turn their back on extremism.

"We are showing by our engagement with Libya today that it is possible for countries in the Arab world to work with the United States and the UK to defeat the common enemy of extremist fanatical terrorism driven by Al Qaeda," he told reporters.

"It is a very, very important signal for the whole of the Arab world." On the first visit to Libya by a British leader since 1943, Mr Blair was whisked to a ceremonial tent outside Tripoli to meet the Libyan leader.

There, the pair symbolically shook hands for the cameras before vowing to work together to oppose fundamentalism. "You are looking good, you are still young," Col Qadhafi told Mr Blair, 50, speaking in English.

Mr Blair said Qadhafi recognized "a common cause with us in the fight against Al Qaeda, extremism and terrorism, which threatens not just the western world but the Arab world also".

The UK leader pledged not to forget the pain caused by the 1988 Lockerbie bombing which killed 270 people but said Libya should be welcomed back into the international fold.

"In reaching out the hand of partnership today, we do not forget the past," he said. "But we do try in the light of the genuine changes happening to move beyond it."

BUSINESS DIVIDEND: Gains to British business from the diplomatic thaw were notched up even before Blair arrived. Oil giant Royal Dutch/Shell won a $200 million gas exploration deal with Libya. -Reuters