You are absolutely right (I think). I know that diplomatic relations between the UK and Libya were broken off due to the incidenct you mentioned, but I am not sure whether flights between the two countries were banned as well. The reason I say this, is due to a recent case where the UK broke off diplomatic relations with Nigeria but flights between the two countries continued. Although it would be a safe bet to assume that what ya have said is in fact correct.
P.S. The US has always regarded Libya as a terrorist nati`n ever since Gaddafi ousted the US-backed Libyan 'king' years before the Pan Am bombing.
P.P.S. Ever get the chance, give Gaddafi's "Green Book" a read...quite interesting.