The deal was signed during a visit to the North African country by French President Nicolas Sarkozy on Wednesday. It foresees the building of a nuclear reactor in Libya to supply drinking water from sea water.

German Deputy Foreign Minister Gernot Erler condemned the deal, warning it was not just a bilateral matter and could damage German interests.

German interests at risk?

"Politically, this business is problematic," Erler told Handelsblatt business daily. "German interests are directly affected."

Erler was referring to German conglomerate Siemens which has a 34-percent stake in Framatome, a nuclear power joint venture it has with France's Areva, the world's biggest maker of nuclear reactors. Areva is reported to supply the plant in Libya.

The deal is also expected to offer Areva access to Libya's vast energy resources. Libya is believed to have uranium stocks of 1,600 tons as well as unexploited reserves.

Erler said Germany had tried in the past to offer Libya help with developing renewable energy, but said Tripoli had failed to react.

He added that European security interests could be affected by the export of nuclear technology and that Paris and Berlin needed to discuss the issue.

"Above all the risk of proliferation increases with every country using nuclear energy," Erler said.

In 2003, Libya agreed to halt a weapons program banned by the United Nations, ending decades of international isolation. In the following year, Libya handed over its stocks of enriched uranium to the Vienna-based nuclear watchdog, IAEA.

"Rehabilitating an incumbent dictator"

Sarkozy's deal with Gadhafi, which came just a day after Tripoli handed over six foreign medics to Bulgaria, has sparked criticism in Europe and in France too.

Daniel Cohn-Bendit, a German politician of the Green Party and a member of the European Parliament described the deal as "ransom" paid by Sarkozy to a "bloody dictator" for the release of the foreign medics.

In an interview with German station RTL, Cohn-Bendit said it was "absolutely mad" that Sarkozy was "rehabilitating an incumbent dictator" with the nuclear treaty.

France's opposition Socialist Party asked: "Is it not a bit soon to be throwing ourselves into Gadhafi's arms and giving him our international endorsement?"

The Green Party accused Sarkozy of "boundless cynicism" rooted in the risk of striking a nuclear deal with an "undemocratic state."

Greenpeace France said the deal "poses an enormous problem in terms of nuclear proliferation" and branded it as "in keeping with the French policy of irresponsible export of nuclear technology."

Greenpeace pointed out that previous French presidents had signed nuclear deals with the former Shah of Iran, ex-Iraqi dictator Saddam Hussein and with South Africa during the apartheid era.

Sarkozy insists deal will not lead to proliferation

Sarkozy however has defended France's nuclear cooperation with Libya, saying that a country which respects international laws can create a civilian nuclear industry.

"If you dare to say that civilian nuclear energy should be closed to the northern shore of the Mediterranean and that the Arab world is not responsible enough for civilian nuclear energy then you're humiliating them and preparing for a clash of civilizations," Sarkozy told French paper Le Monde.

An official with France's Atomic Energy Commission (CEA) insisted that international safeguards imposed after Libya scrapped its military nuclear program would prevent any proliferation.

Simon Nisan told news agency AFP International Atomic Energy Agency (IAEA) controls made it "almost impossible" to divert the technology to military use.

"The controls are so tight that you don't have the right to remove the fuel without the presence of IAEA inspectors," he said.