The UK will not try to access £12 billion ($16.46bn) of frozen Libyan funds to compensate victims of IRA attacks supported by former leader Muammar Qaddafi, parliament was told.
The British government also decided against creating a fund for victims of Qaddafi-sponsored terrorism and wants Libyan authorities to pay for it.
It also said it would not publish a report on the wider matter of compensation related to Qaddafi-backed IRA bombings.
The report's author, William Shawcross, said he was "surprised and disappointed" by the government's response. But he said his contract with the Foreign Office prevented him discussing the contents of the report.
He appeared before parliament’s committee on Northern Ireland on Wednesday, where he said it was always his understanding that the 90-page report was confidential and not for publication.
"I am aware, of course, of the agony of people's expectations in Northern Ireland.
"It was brought home to me throughout my six months working on this, that the raised expectations and disappointed expectations of people over years and years is a terrible thing in Northern Ireland."
MPs and victim associations condemned the handling of the issue by the government.
The regime of the former Libyan dictator, who was toppled and killed in 2011, provided explosives to the IRA that were used in several deadly attacks.
Mr Shawcross said that he was “strongly advised” by people he knew in Northern Ireland not to approach victims or their representatives.
This was because it was thought it would “add too much to people’s expectations, that this was going to be a complete answer, that I was going to provide a complete answer".
Explaining the government's decision on Tuesday, Middle East minister James Cleverly said the submission provided by Mr Shawcross “was commissioned as an internal scoping report, to provide internal advice to ministers, and draws on private and confidential conversations held by Mr Shawcross”.
Mr Cleverly said the UK government could not acquire funds frozen by a UN resolution and the responsibility for providing compensation lay with the Libyan state.
“However, there are clear practical difficulties in obtaining compensation from Libya for Qaddafi-sponsored IRA terrorism.
“The conflict, political instability and economic instability that have prevailed in Libya for most of the last 10 years since the fall of the Qaddafi regime present particular challenges.”
Simon Hoare, committee chairman, said the government’s announcement “will be a bitter blow to those who have waited so long for recognition and justice and who were urged to put all of their hopes and dreams into Mr Shawcross’s appointment”.
That officials decided “to do nothing” after much deliberation added insult to injury, Mr Hoare said.
“This important issue has never been treated with the seriousness and urgency it required. The only upside is that at least, and at last, we now know, and victims now know, what the government’s final decision is.
“Futile hope can be extinguished and my heart goes out to all of those who will be feeling so let down,” he said.
Kenny Donaldson, of the support group Innocent Victims United, said the government was “responsible for heaping further pain upon those already treated so shamefully. The Shawcross Report can’t even be described as a whitewash because it continues to be held back from victims – the full contents remain hidden".
