Megrahi, suffering from cancer and doctors have said he has just three months of life, was released by the Scottish Executives last week on humanitarian grounds, despite opposition from the United States.
He was given a hero's welcome on his arrival in Libya last week. US President Barack Obama had termed it highly objectionable.
"If they continue to lionise him in a public fashion, that these kinds of public demonstrations can only have a profoundly negative effect on our relationship," State Department spokesperson Ian Kelly said. The US has asked Libya to put Megrahi under house arrest.
"We've been looking forward to a productive relationship with Libya, and we had hoped that Libya had put into the past its – the kind of relationship that it had with terrorism. We want to see a Libya that cooperates with us, that shows clear indications that they're prepared to put this in the past and move forward. So we will be watching very closely," Kelly said.
Noting that it would be premature to discuss what action the US could take against Libya, Kelly said the Obama Administration is watch very closely.
