By Zeeshan Haider and Mubasher Bokhari
LAHORE, Pakistan (Reuters) - A CIA contractor was acquitted of two murder charges and released by a Pakistani court on Wednesday after a deal to pay "blood money" to the victims' families was reached, Punjab Law Minister Rana Sanaullah told Reuters.
The deal, reached just hours after the contractor had been indicted, ends a long-simmering diplomatic standoff between Pakistan and the United States.
"The court first indicted him but the families later told court that they have accepted the blood money and they have pardoned him," Punjab Law Minister Rana Sanaullah told Reuters.
"The court acquitted him in the murder case."
Raymond Davis, 36, shot dead two Pakistanis in the eastern Punjab city of Lahore on January 27 after what he described as an attempted armed robbery. He said he acted in self-defense and the United States says he had diplomatic immunity and should have been immediately repatriated.
The case became a major test of ties between the United States and Pakistan, a vital ally in the U.S.-led campaign against Taliban militants in Afghanistan.
After Davis' acquittal, the case could become even more contentious in Pakistan. The country's powerful religious parties had tried to block such a deal, calling for Davis to be hanged, and the families' lawyer suggested they had been forced to sign the papers.
"We were put in detention for four hours and not allowed to meet our clients who were called by authorities to the court," Asad Manzoor Butt, a lawyer for family of one of the slain men told Reuters.
Media reports said Davis was immediately flown to London, but it was impossible to verify that. The U.S. embassy had no immediate comment.
There had been speculation that a deal was in the works between the United States and the families of the dead men, including a third killed when a U.S. consulate vehicle struck him while en route to extract Davis from the scene.
Such payments are sanctioned by Islamic law and are common in some parts of rural Pakistan as a way to settle disputes.
Questions swirled around the identity of the victims from the beginning, with some media reports saying the men worked for Pakistan's Inter-Services Intelligence (ISI) agency, and that they might have been known to Davis.
Other reports suggest they were armed robbers who had already targeted others in Lahore before attempting to rob Davis, tailing him on motorbikes along a congested city road.
The case also strained ties between the CIA and Pakistan's main Inter-Services Intelligence (ISI) agency, which said it was unaware Davis was working in Pakistan.
(Additional reporting by Zeeshan Haider and Rebecca Conway; Editing by Chris Allbritton and Daniel Magnowski)