President Bush says Libya has agreed to destroy all of its chemical, nuclear, and biological weapons.
The surprise announcement follows nine months of secret talks between Libyan, American, and British officials.
President Bush says it is a development of great importance that will make America safer and the world more peaceful.
"As the Libyan government takes these essential steps and demonstrates its seriousness, its good faith will be returned," he said. "Libya can regain a secure and respected place among the nations, and, over time, achieve far better relations with the United States."
While senior Bush administration officials say there has been no talk of lifting U.S. sanctions against Libya, the president appeared to set the stage for such a move if the country follows through on promises to declare all nuclear activities.
Libya has agreed to abide by the Nuclear Nonproliferation Treaty, to allow for immediate inspections and monitoring, and to eliminate ballistic missiles traveling more than 300 kilometers with a 500 kilogram payload.
In Tripoli, Libyan leader Moammar Gadhafi said his country is now the initiator urging governments in Africa and the Middle East to give up weapons of mass destruction. He says Libya is playing this role to protect international peace and build a world free from terrorism and weapons of mass destruction.
President Bush says the development is a major step forward in preventing weapons those weapons from falling into the hands of terrorists. He says countries that dismantle such weapons will find a path to better relations with the United States.
While he was clearly pleased by the announcement, the president says Libya has a troubled history, and America and Britain will be vigilant in making sure the country keeps its word.
"Libya should carry-out the commitments announced today," he said. "Libya should also fully engage in the war against terror."
A senior administration official says Libya allowed U.S. inspectors to visited weapons sites where they saw decade-old mustard gas and centrifuges for enriching uranium. Though he gave few further details about Libya's weapons program, the official said it was more advanced than Washington thought.
The official says Libyan authorities also acknowledged working with North Korea to develop extended-range Scud missiles.
A separate White House statement on Libya's announcement says the president's strategy on combating weapons of mass destruction gives governments a choice. They can pursue those weapons at what the administration calls great peril, cost and international isolation. Or they can renounce the weapons and have U.S. help in creating a better future for their citizens.
When asked if Libya's decision to open talks with British and U.S. officials in March might have been influenced by the U.S.-led invasion of Iraq, the senior administration official said he can not imagine the invasion went un-noticed in Tripoli, but he says no Libyan authorities ever made that direct connection.