SIRTE, Libya (Reuters) - Libya lifted a visa ban on citizens of 25 European countries on Saturday after EU president Spain said a Swiss-instigated visa blacklist against 188 Libyans in those countries had been scrapped.

The end to the visa ban and the Schengen zone blacklist will likely defuse a crisis that has threatened to damage growing business ties between Europe and oil exporter Libya.

"In the interests of strengthening its cooperation with the European Union, Libya lifts the restrictions it earlier imposed on the citizens of the Schengen zone," Libya's Foreign Ministry said in a communique carried by JANA, the state news agency.

Spain's foreign ministry had earlier issued a statement announcing the visa blacklist had been torn up and expressed regret as part of a diplomatic drive by EU leaders.

"Libya expresses its appreciation at the European Union for this move," JANA quoted the Foreign Ministry statement as saying. "This is a defeat for Switzerland by means of collective European action. Libya accepts the EU decision..."

Libya stopped issuing visas to citizens from the Schengen borderless travel zone in retaliation for Switzerland, a Schengen member, barring entry to 188 Libyan citizens including the country's leader Muammar Gaddafi and members of his family.

The Swiss move prevented the blacklisted Libyans from entering any of the other Schengen states because the terms of the Schengen agreement obligate all members to refuse visas to citizens of countries blacklisted by fellow Schengen nations.

The Schengen area is a borderless travel zone grouping 22 EU nations plus Switzerland, Norway and Iceland.

GENEVA ARREST

The Spanish statement was issued after Spain's Foreign Minister Miguel Angel Moratinos arrived for talks in the Libyan town of Sirte, where Gaddafi is this weekend hosting a summit of the Arab League.

"All the names of the Libyan citizens included in the list of the Schengen information system have been removed," the ministry said in a statement which it said came from Spain's EU presidency.



"We regret and deplore the trouble and inconvenience caused to those Libyan citizens. We hope that this move will not be repeated in the future."

Italian Prime Minister Silvio Berlusconi -- whose country has some of Europe's closest business ties to Libya and who has criticised the Swiss visa blacklist -- was also in Sirte on Saturday as Gaddafi's guest.

Switzerland has been locked in a diplomatic dispute with oil exporter Libya since July 2008, when police in Geneva arrested Hannibal Gaddafi, a son of the Libyan leader, on charges of mistreating two domestic employees.

In February Gaddafi urged jihad against Switzerland and earlier this month Libya slapped a trade embargo against Switzerland.

The charges were swiftly dropped and Hannibal Gaddafi was released, but Libya stopped oil exports to Switzerland and withdrew millions of dollars from Swiss banks.

The Swiss government is pushing for the release from prison of Max Goeldi, a Swiss businessman who was barred from leaving Libya soon after Hannibal Gaddafi's arrest. He is serving a four-month sentence for breaking immigration rules.

Libyan officials deny any connection between Goeldi's prosecution and Hannibal Gaddafi's arrest.

A senior Libyan official, who did not want to be identified, told Reuters on Friday that Goeldi would be freed "very soon." Goeldi's lawyer said if his client was to be released early it would happen after the summit ends on Sunday.