Scottish Justice Secretary Kenny MacAskill is likely to announce his release on compassionate grounds.

Megrahi, 57, who has served eight years of a life sentence for killing 270 people in the 1988 bombing of Pan Am flight, has terminal prostate cancer.

Some 189 Americans were among those who died in the airliner explosion.

Mr MacAskill has been under intense pressure from the US government to keep Megrahi behind bars, with US Secretary of State Hillary Clinton saying his release would be "absolutely wrong". 

Earlier, a letter from seven US senators including Edward Kennedy and John Kerry had urged the Scottish Government to block Megrahi's bid for release.

Mr MacAskill said on Wednesday he had informed families and other interested parties that he had reached his decision on the applications for compassionate release and a prisoner transfer.

He will announce his decision at 1300 BST at the Scottish Government's ministerial headquarters in Edinburgh.

A spokesman for the administration insisted the decision had been reached "on the basis of clear evidence and on no other factors".

BBC correspondent Peter Hunt said Megrahi was described as having only months left to live.

"Given this prognosis, it's thought that the perpetrator of Britain's biggest terrorist atrocity - who two days ago abandoned his appeal against his sentence - has now spent his last night in a Scottish jail.

"It's expected he will be allowed to return home to die," he added.

It is thought preparations for Mr Megrahi's possible release were being made in time for him to be home with his family in Libya by Ramadan, which starts on Friday.

Chancellor Alistair Darling, standing in for the prime minister while Gordon Brown is on holiday, said it was a decision for the Scottish Government.

On Tuesday, judges at the High Court in Edinburgh who accepted Megrahi's application to drop his appeal were told the Libyan's health had recently worsened very considerably.

Megrahi has recently been serving his sentence at HMP Greenock, in the west of Scotland, after being convicted of the bombing under Scots law at a specially convened court in the Netherlands in 2001.