A judicial review of al-Megrahi's case two years ago raised serious questions about the evidence used to convict him, spurring his appeal. But people with pending appeals cannot be transferred to another country, a fact that prompted al-Megrahi's request for permission to abandon his appeal.
The Scottish court still has to hear a separate appeal by the government, which feels the bomber's 27-year minimum sentence is too short. A hearing on that is scheduled for Sept. 8.
The lead judge, Arthur Hamilton, urged state prosecutors to decide "without undue delay" whether to continue with their appeal.
MacAskill has said he will decide within two weeks whether to release the ailing al-Megrahi on compassionate grounds, transfer him to a Libyan prison, or keep him in a Scottish jail.
The prospect of al-Megrahi possibly being released has angered some of the victims' families who argue that Libyan leader Moammar Gadhafi would feel vindicated if the convicted bomber were allowed to return to Libya.
"He should remain in prison," said Susan Cohen of Cape May Courthouse, New Jersey, whose 20-year-old daughter Theodora died in the attack.
"We've had very little justice in this case," she said.
"If al-Megrahi is released, there will be no tangible evidence left that this ever happened. It's kind of a way of obliterating it. Gadhafi will win and al-Megrahi will be a hero."
But relatives of some British victims want him to be released on compassionate grounds and to carry on with the appeal, which could have continued after al-Megrahi's death, as a way of uncovering more information about the bombing.
"The criminal inquiry is now ending in the worst possible way for the relatives and friends of those who died," said the Rev. John Mosey, whose daughter Helga died aboard Flight 103.
"We are left in limbo with a conviction, but now not the opportunity to hear for ourselves the evidence that convinced the Scottish Criminal Cases Review Commission that there was a possible miscarriage of justice."
Mosey said he was "85 percent sure" al-Megrahi was not guilty. The Libyan's lawyers have argued the attack was the result of an Iranian-financed Palestinian plot.
Margaret Scott, Al-Megrahi's lawyer, told the court Tuesday that her client has advanced prostate cancer and had been given only months to live.
"This has now reached the terminal phase and he is in severe pain and in great distress," she said.
Though judges agreed Tuesday to remove one barrier to the prisoner's possible release, they said other legal obstacles remain. Al-Megrahi would not be eligible to be transferred to a Libyan jail until the government appeal is heard.
Some British media had reported that MacAskill could free al-Megrahi on compassionate grounds in time for the Muslim holy month of Ramadan, which begins Saturday. That would allow him to fly back to Libya a free man.
However, Scotland's government said Tuesday that no decision has yet been made.