Syed Bukhari, 46, from London, was accused of plotting to sell £26 million of surface-to-air missiles to a ruthless Colombian terror gang.

Mr Bukhari was said to have agreed to supply the Russian-made missiles and a cache of other weaponry to an under- cover FBI agent who was posing as a dealer for the Revolutionary Armed Forces of Colombia (Farc), the left-wing terror group.

US agents had spent more than two years planning and executing the elaborate operation. Legal experts said last night that the failure of the case highlights the problems for foreign law-enforcement agencies involved in counter-terror operations in Britain.

It also raises questions about how investigators can operate here under the Terrorism Act.

Yesterday Judge Stephen Kramer, QC, was forced to halt the trial halfway through its scheduled eight weeks. It has cost the British taxpayer millions of pounds. The court had sat behind closed doors for a week as both sides argued over public interest immunity issues, before the judge ordered the Crown to hand over more sensitive documents from US law-enforcement officials. When the FBI refused, the Crown had no alternative but to throw in the towel and Mr Bukhari was formally discharged after spending 19 months in custody.

Last night US diplomats in Britain were saying little about this setback in their War on Terror. A spokesman at the US Embassy in London said: “While the US regrets that the prosecution had to be dismissed, it is respectful of the UK’s legal system and understands that the Crown had to make a decision about the disclosure or non-disclosure of the information.”

Officials refused to give details of the documents that the FBI had refused to hand over, or why the agency did not want them revealed in court. Nor would they say if the outcome of this case will affect the way FBI agents are told to conduct future undercover terror operations in Britain.

Since the September 11 attacks on America, FBI agents have intensified their operations in Britain. They have increased their numbers based at the US Embassy, in Grosvenor Square, and are understood to have an agent based permanently at Scotland Yard. They work closely with MI5 and MI6 as well as Scotland Yard’s anti-terrorist squad.

While the main focus of their operations is Islamic extremist groups, this investigation concerned Latin America’s oldest, largest, most capable and best-equipped insurgent group.

Farc has been involved in the murder and kidnap of US contractors and human rights workers. The group is also heavily involved in the Colombian drug trade and is alleged to have close links with foreign terror groups, including the IRA.

The FBI had claimed that Mr Bukhari, who lives with his family in Hendon, northwest London, agreed to supply the group with 200 Russian-made shoulder-launched missiles, the Igla SA18, which is capable of bringing down aircraft.

Each missile costs about £130,000, and it is regarded as the most advanced of its type. Experts say that it can defeat missile-avoidance technology, leaving aircraft defenceless. The British dealer was also accused of supplying rocketpropelled grenades and 900 AK47 rifles, which could have armed a thousand-strong battalion of fighters.

Richard Hallam, Mr Bukhari’s solicitor, said outside the court that his client was “delighted that his lack of involvement in any offence has now been made clear”.

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