A LEBANESE hijacker who was jailed for life for the murder of a US Navy diver has been set free, prompting speculation that he was part of an exchange deal to secure the release of a German hostage in Iraq.

Mohammed Ali Hammadi belonged to the Hizbollah gang that seized a TWA airliner in 1985 and murdered an American passenger and dumped his body on the tarmac in Beirut. He was jailed in Germany four years later, but three of his accomplices remain on the FBI’s list of most-wanted terrorists.

Mr Hammadi slipped out of Germany last week, shortly before the release of Susanne Osthoff, 43, an archaeologist and the first German hostage in Iraq. It had been assumed that the German Government paid a ransom, but now commentators are asking whether the two were traded.

“There is no connection between the two cases,” Martin Jaeger, a Foreign Ministry spokesman, said. A spokeswoman for the Justice Ministry added that Mr Hammadi had served his sentence and was free to go. “There was no current US extradition request,” she said.

However, the German Government was aware that the US wanted Mr Hammadi to be extradited to America on his release. Washington, barely concealing its irritation, last night insisted that it would seek Mr Hammadi’s extradition from Lebanon. “We are disappointed by the fact that he was released before the end of his full sentence,” Sean McCormack, a spokesman at the State Department, said.

Germany has experience in Middle Eastern prisoner exchanges. Palestinian terrorists captured after the massacre of Israeli sportsmen at the Munich Olympics in 1972 were quietly freed in part payment for the release of hostages. And in 1987 the German Government turned down a US request for the extradition of Mr Hammadi to protect two German hostages in Lebanon.

Susanne Osthoff was held by her Iraqi kidnappers for 24 days after she and her driver were grabbed on the road to Kirkuk in northern Iraq. Terrorism experts assumed that she was being held for ransom.

Angela Merkel, the German Chancellor, approached the US Administration for help but, by the time the Americans became involved, German agents had traced Frau Osthoff and engaged a mediator.

Diplomats argued yesterday that the gang that held Frau Osthoff lacked the sophistication to be part of a prisoner trade. A Western envoy said: “Their real aim was probably to make some money.”