(Updates with Bulgarian comment on new conditions, para 8-9)

TRIPOLI, July 23 (Reuters) - Bulgaria said it hoped Libya would finalise a deal on Monday to free six foreign medics convicted of infecting hundreds of Libyan children with HIV, a move that would boost Tripoli's relations with the West.

Libya lifted death sentences against the medics last week but is now asking for normalised ties with the European Union and is holding out for more foreign funds to treat the children before it will allow the foreigners to go home, diplomats said.

The EU insists the five Bulgarian nurses and Palestinian doctor are innocent and has been unwilling to pay compensation that could be interpreted as an admission of their guilt.

Last week a Libyan judicial council commuted the death sentences against the six, convicted of deliberately infecting more than 400 children at a Benghazi hospital, to life imprisonment after the victims' families received a $460 million settlement.

That opened the way for the nurses to return home under a 1984 prisoner exchange agreement. Once in Bulgaria, they could be pardoned by the country's president, Georgi Parvanov.

"We are at the stage now where the decision is purely political," Bulgarian Foreign Minister Ivailo Kalfin told reporters in Brussels.

"I hope there will be enough will from the Libyans' side today in order to finalise talks ... If they show this will, then the transfer can be done very quickly."

Bulgarian national television quoted Kalfin as saying later on Monday that Libya was constantly setting new conditions for the medics' transfer, which was making the negotiations tough.

"Allow me not to go into any details because that would make all the efforts that are being made in Libya right now meaningless," Kalfin was quoted as saying.

Libya emerged from decades of isolation in 2003 when it scrapped a programme of prohibited weapons and returned to international mainstream politics.

The country has begun opening its big energy reserves to foreign oil firms and the United States said this month it was sending its first ambassador to Tripoli in 35 years, but there could be a heavy diplomatic cost if the medics are not freed.

Prospects for their release appeared to rise on Sunday after EU External Relations Commissioner Benita Ferrero-Waldner and France's First Lady Cecilia Sarkozy flew to Libya.

"The European Commission hopes that this situation, which is so painful and has lasted so long, can be resolved in a humane spirit," the Commission said in a statement.

"WE ARE WAITING"

An EU official would only say that the two women were in Tripoli talking to the Libyan authorities on Monday, and declined to comment on media reports that the nurses would be flown out to Sofia on Monday aboard a French presidential plane.

In Bulgaria, a big poster reading "We are waiting for you" was placed at the Sofia airport's arrival hall.

Last Friday, the EU held out the prospect of a quick boost to trade, aid and political relations with Libya if the fate of the six jailed medics was resolved in a satisfactory way.

A Libyan diplomatic source said on Monday Tripoli was after a complete normalisation of its ties with EU states. A French diplomat familiar with the talks said the main obstacle was still money, with Libya holding out for more foreign cash.

The families of the 460 HIV victims received $1 million each in the settlement from a fund set up by the Gaddafi Foundation, a charity run by a son of Libyan leader Muammar Gaddafi, that a spokesman for the families said was financed by the EU, the United States, Bulgaria and Libya.

But diplomats said the Libyans had asked the EU to contribute more money to modernise a health centre in Benghazi where the infected children can be treated and to help pay for their treatment abroad in the interim.

Libyan officials have signalled they want an existing agreement on these two points firmed up, with specific details included on how the EU will fulfil its commitments in practice.

"Once you remove these two roadblocks, the nurses will find themselves back in Sofia," said Libya expert Saad Djebbar, a London-based Algerian lawyer.

Bulgaria and its allies in the EU have provided long-term medical aid to victims and support for the Benghazi hospital. (Additional reporting by Kremena Miteva and Anna Mudeva in Sofia, Emmanuel Jarry and Jon Boyle in Paris and William Maclean in Algiers)

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