JOIN USThe LSE director Howard Davies said the decision to accept research funding from a foundation controlled by the Libyan dictator's son, Saif Gaddafi, had "backfired", the Daily Mail reported.
Gaddafi, who is in power since 1969, has been facing mass uprising for more than two weeks. He has also been condemned by the international community for shooting down unarmed protesters.
Around 1,000 people have been killed and more than 100,000 have fled the strife-torn country since unrest began Feb 14, soon after successful revolts toppled the long-term regimes of neighbouring Tunisia and Egypt.
Davies, who is also the deputy governor of the Bank of England, said the decision to accept 300,000 pounds from the Gaddafi International Charity and Development Foundation had been debated "extensively" within the LSE.
"We looked at the pros and cons of engaging with someone like Saif Gaddafi and with the problems in north Africa and we decided that we would do so," Davies told the BBC Radio 4 Today programme, according to the Mail.
"In retrospect we can say that, knowing what we know now and how he has behaved in this crisis, that's a judgement that we might have made differently," Davies was quoted as saying.
Half of the 300,000 pounds has already been spent on research related to North Africa and the development of democracy and civil society there, the LSE chief said.
"I feel embarrassed about it but I don't think the decision was made without due consideration at the time," he said, adding that all of the money would now be put into a scholarship fund.
"I'm not ashamed of what we've done with the money but I do think it's clear that the source of it is not one we want to be associated with, because it is clear that the analysis of Saif Gaddafi which saw him as a modernising figure in the regime - and I think many governments around the world saw him as such - that does not look to have been a good assessment," he said.
Davies also expressed regret that he visited the country following instruction from then British Prime Minister Tony Blair to advise the regime about how it could modernise its financial institutions.
"Clearly now I wish I hadn't done that, but I was asked by the government to do it," he added.