Executive director of the Kadhafi Foundation, Salah Abdessalam, told AFP that fresh talks would begin on January 15 after a delay was called "for psychological reasons".

An official source said that the talks, originally set to resume on Wednesday, were postponed after a court ordered a retrial for the five Bulgarian nurses and a Palestinian doctor who had been sentenced to death for allegedly causing the infections.

He said the meeting had been put off owing to the psychological effect on the families of the Libyan supreme court's decision on Sunday.

The discussions are aimed at finding a deal on compensation for the victims and have stoked hopes in Bulgaria that the nurses could one day be freed after having already spent seven years in jail.

Bulgaria announced last week it was creating a fund for AIDS-infected children in Libya, a move greeted in some quarters as heralding a possible breakthrough in the stalemate.

Bulgaria's President Georgy Parvanov had admitted that a release of the nurses would "have a very high price" and it remains unclear what role the fund will play in finding any eventual solution.

"The discussions that were to have taken place between the families and a Bulgarian association on December 28 were delayed to the adverse effect of the supreme court's judgement on these families," the source told AFP.

"This decision has delayed an agreement between the parties and forced them to adjourn the discussions," added the source.

The source said that discussions about the payments had been taking place in the presence of international representatives including from the European Union, Britain and the United States.

As well as seeking an agreement on compensation, the talks were looking at finding a way to care for the infected children and set up a centre for them in their town of Benghazi.

The nurses stand accused of transfusing HIV-contaminated blood into 426 children at a Benghazi hospital on Libya's Mediterranean coast. Around 50 of them have since died of AIDS.

The retrial is due to be held in one month in Benghazi. The supreme court's decision had been greeted with dismay by the families.

The Benghazi court that first condemned the medics had rejected testimony from Luc Montaignier, the French doctor who first isolated HIV, and Swiss and Italian colleagues, that the epidemic was due to a lack of hygiene.

Instead the court based its verdict on a report by Libyan experts that placed the blame on the foreign health workers.