July 30 (Reuters) - Libya's ties with America are improving but some issues still block full normalisation despite the release of six foreign medics in a move long sought by the West, Muammar Gaddafi's most influential son said on Monday.

Here are selected extracts of the interview with Saif al-Islam.

Q - What does the Bulgarian nurses' case mean for Libya's ties with the West.

A - It was a good deal for Libya. It's a good deal in our relations with the West, and with ourselves. It's good to put an end to this tragedy -- a happy ending for all parties.

Q - Since the medics' release, a dispute has arisen over the pardon they received. Will this dispute continue or blow over?

A - It was obvious from the beginning that the Bulgarians were going to pardon the medics. And when we said that the Libyan officials were surprised, I think I was surprised ... because they knew that they were going to pardon them.

Q - Is the Bulgarian nurses' cases the final controversy before Libya normalises its ties with the outside world?

A - With the EU, yes I think we overcame the last obstacle in order to have a fully normal relationship. With the Americans of course it's better, and it's getting better and better, but we still have issues. Still we have files that are not closed with the Americans such as La Belle. We need to talk more and negotiate to close those files.

Q - (Libyan intelligence agent Abdel Basset) al-Megrahi has won his request for a review. If he does win a new appeal will Libya demand the return of the compensation money it has paid?

A - The top of our priority is the return of Mr Megrahi and not the return of the money because I think he is more important than the money. The issue of the money should come later on but until now our focus is on the return of Mr Megrahi.

And we believe that he is innocent and we hope that further progress will happen soon.

Q - So just to reiterate, Libyan had no role in the Lockerbie tragedy?

A - Of course not.

Q - Can you tell us who you think was behind that event?

A - I don't know, but you are aware of the latest developments in this case, the Scottish legal authority found there was a mishandling of evidence... therefore we are very optimistic about the case. We are confident one day it will be proved to the world that we had nothing to do with Lockerbie.

Q - In all these crises that you have dealt with, what motivates you to solve these issues?

A - We had a cocktail of embargoes and sanctions. We had international one, a European one, an American one. It was a big burden on our shoulders. We could not do any reforms with that burden. First you had to fix that and then you can start the internal reforms. Solving those issues and problems was a means, not an end. The end is to have internal reforms.

Q - Are your economic reforms here to stay

A - Yes of course. People are fed up with mismanagement, with state control and all means of production and services, and with poor services, and now they want to see something (different) and the process has started and it's impossible now to stop it.

Q - It's not an easy task because you have what some people call conservatives, an anti-reform old guard, and you have used the term fat cats. Are these obstacles significant?

A - I mean the issue of conservatives, or the old guard, this is equal to the issue of the Bulgarians, that file has been magnified by us, we created that story, the Libyans. They found that there were Bulgarians and a Palestinian doctor -- it means there is a connection with Israel, Mossad, with Western intelligence. There is a conspiracy. They build up a story. They forced the Bulgarians to admit to something and then here we are, we have a story, we have conspiracy, we got that complicated file which we can carried for, what, eight years?

But the moment we sit together and decided to solve the issue, we solved it in a couple of days. It's the same thing with the old guard. It's an invented story. We do have fat cats but not old guards. It's not like in Iran where you have opposition to the reforms. It's just a made up story. It's very easily to reform the economy, to modernize our country. We are very rich with a small population, with a very important and strategic geopolitical location."

You magnify the 'old guard, conservatives' but in fact we don't have all that. That's why (reform) it's very easy in Libya.

Q - People wonder how you can have economic reform without political reform, without politics interfering in business. How far along the road are you to getting political freedom of that kind in Libya?

A - I cannot say we do not have freedom at all, now, but we have what we call a 'managed' democracy and I think we are going to also have a 'floating' democracy and not a managed one and a full democratic system, but it takes time, it takes a month, one year, two years I don't know. But, again, we started the process and the evidence is that we are speaking openly about this in Libya.

Q - If the EU says we will give you more advantages if you become more democratic, is that going to help things or hinder them?

A - I don't think it a good idea to have a foreign link or interference because it is going to create a negative reaction. I think it should happen within Libya, it should be purely Libyan, stuff that we should fix. We shouldn't engage Europeans, Americans, or Japanese, in that."

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