The move was announced shortly after Silvio Berlusconi took an oath to serve as Italian prime minister for the third time and heralded potentially stormy relations between two countries that have been diplomatic and economic allies.

Libya watchers said the timing of the statement was deliberate because Berlusconi ignored Libya's warning against appointing a far-right lawmaker to a cabinet post.

An Italian online newspaper also cited Libyan diplomatic sources as saying Tripoli was preparing sanctions against Italy to protest at Roberto Calderoli.

Energy news daily Staffetta Quotidiana said these included stopping visas for Italians and dissolving an agreement, signed in October, to extend Italian oil company ENI's activities.

Italy is OPEC member Libya's main European trade partner and ENI holds stakes in pipeline, natural gas and oil projects in Libya.

"Libya has been suffering in the struggle of warding off the flow of illegal migrants to Italy by depleting its material resources and spending huge amounts of money to protect Italian coasts from waves of illegal migrants," Tripoli's Interior Ministry said in a statement faxed to Reuters.

"Libya is no longer responsible for protecting Italian coasts from illegal migrants ... because the Italian side did not make good on its commitment to provide support for Libya."

Online Staffetta said Libya planned to break a strategic agreement signed between ENI and Libya's National Oil Corporation (NOC) and that Tripoli had "not excluded" nationalising ENI's Libyan assets.

ENI declined to comment on the report.

A Libyan charity group, chaired by national leader Muammar Gaddafi, had warned of "catastrophic repercussions" for ties between the two countries if Calderoli became a minister.

A member of the Northern League party within Berlusconi's previous coalition, he angered Muslims in 2006 by wearing a T-shirt emblazoned with cartoons of the Prophet Mohammad that prompted deadly riots in Libya.

He further outraged Italy's Muslim community last year by promoting a "pig day" protest where he threatened to walk a pet pig in an area reserved for a new mosque.

The Gaddafi International Foundation -- which made a similar warning on bilateral ties when the riots erupted in 2006 -- is headed by Gaddafi's son Saif al-Islam, widely thought to play a major role in Libya's diplomacy with Western states.

Libya's Interior Ministry said it expected an increase in the number of illegal migrants from sub-Saharan countries to cross to Italy via Libya this summer -- usually a peak season for migrants because Mediterranean waters are calm.