By Arshad Mohammed

NEW YORK, Sept 24 (Reuters) - The U.S. State Department said it is rethinking a decision to give $2.5 million in aid to Libya, including to foundations run by the Libyan leader's sons, after lawmakers on Thursday asked it to cancel the plan.

In a letter to U.S. Secretary of State Hillary Clinton, two U.S. lawmakers said they were unwilling to give the aid because of the warm reception Tripoli recently gave a Libyan official convicted of involvement in the 1988 Lockerbie bombing.

They also accused Libyan leader Col. Muammar Gaddafi of showing "flagrant disrespect" for the 270 victims of the bombing during his visit to New York this week to attend the U.N. General Assembly.

"The celebration that President (Gaddafi) recently held in honor of ... the only man convicted in the bombing of Pan Am Flight 103, showed just how little remorse (he) has for the terrorist attacks that killed 270 civilians," Rep. Nita Lowey and Rep. Kay Granger wrote in a letter obtained by Reuters.

Lowey, a New York Democrat, chairs the influential House of Representatives appropriations subcommittee that oversees funding for the State Department and U.S. foreign assistance. Granger, of Texas, is the subcommittee's top Republican.

While the State Department could reject their request, as a practical matter it is unlikely to do so because of the power that the appropriations committee has over its budget.

State Department spokesman P.J. Crowley said the department was rethinking the funding, which two sources said had included $200,000 each for two foundations run by Gaddafi's sons.

One source said one foundation promoted civil society and the other women's empowerment.

"The decision to appropriate the money was made some time ago but, in light of recent events, we will be taking another look at these decisions," Crowley said.

The "recent events" was a reference to the celebratory reception Abdel Basset al-Megrahi received on his return to Libya last month after being freed by Scottish authorities on compassionate grounds because of his terminal cancer.


Gaddafi's U.S. visit has upset some family members of the Lockerbie victims who resented his unsuccessful efforts to get permission to pitch a Bedouin tent he likes to stay in in Central Park and in two other sites near New York City.

On Wednesday, Gaddafi delivered a rambling 94-minute speech to the U.N. General Assembly that touched on everything from the assassination of John F. Kennedy to swine flu and denounced the powers of the U.N. Security Council, which he said should be called the "Terror Council."

Despite Gaddafi's unpredictability, the United States in late 2003 began a process of rapprochement with Libya after decades of estrangement because of Tripoli's decision to abandon the pursuit of weapons of mass destruction.

In an interview with the Wall Street Journal newspaper, Gaddafi appeared to strike a conciliatory tone, saying he could "comprehend" the anger directed at him by Americans who lost relatives in the Lockerbie bombing.

Gaddafi also said he hoped to build a new era of relations with U.S. President Barack Obama and wanted to put his nation's long conflict with the United States in the past.

"As a case, the Lockerbie question: I would say it's come to an end, legally, politically, financially, it is all over," the newspaper quoted Gaddafi as saying. "I would say, thank Allah, that this problem has been solved to the satisfaction of all parties. We all feel the pain for such a tragedy."

He also made clear his desire for his country to benefit from Western technology.

"Libya does need the technology of the advanced world," Gaddafi said. "And if Libya wishes to develop itself, it must cooperate with the developed world."