TONY BLAIR struck a secret deal with the king of Saudi Arabia, assuring him that there would be no criminal charges against anyone implicated in bribery in Britain’s biggest arms deal.

In July 2005 Blair assured the then crown prince, Abdullah bin Abdul Aziz, who is now king, that Britain would abandon an inquiry by the Serious Fraud Office. It concerned a £60m “slush fund” allegedly set up by BAE Systems, Britain’s biggest defence contractor, to support the lifestyle of some members of the Saudi royal family.

Blair told Abdullah during a visit to Riyadh, the Saudi capital, that the evidence would instead be offered to the Saudi authorities.

Sources with knowledge of the discussions say that even as the SFO inquiry was expanding with the arrest of five British business executives, Blair was telling Abdullah that the inquiry “was going nowhere”.

Disclosure of the secret deal undermines a parliamentary statement made by Lord Goldsmith, the attorney-general, last December that prosecutors, rather than Downing Street, had made the final decision to drop the inquiry.

It comes as the Organisation for Economic Cooperation and Development prepares to send inspectors to London to find out why the inquiry was dropped. Last week it rebuked the government for its decision to drop the case.

The row flared last December after Goldsmith announced the halting of the slush fund inquiry. The payments, in the form of lavish holidays, luxury cars, rented apartments and other perks, are alleged to have been paid to ensure that the Saudis continued to buy from BAE under the so-called Al-Yamamah deal, rather than going to France or elsewhere.

Worth £43 billion to date, the contract has kept BAE in business for 20 years.

The inquiry had closed in on a series of secret Swiss bank accounts through which commissions had been paid. Sources close to the deal say the accounts were in the name of a Panamanian company ultimately controlled by a British-based businessman who is reported to have made £800m from the arms deal. Some of the accounts showed payments to individuals connected to the Saudi royal family.

One source said: “Blair told the Saudis he had always thought the SFO prosecution was wrong. He thought no one in BAE had taken any bribes or had benefited personally from the deal.”

Another source said: “Blair promised the king that the prosecution was going nowhere. He said that one way or another the Al-Yamamah investigation would go away.

“It was on that basis that they signed a new accord to carry on with the deal to buy the first 24 of 72 promised Typhoons [Eurofighter jets]. So they hit the roof when they found the SFO had been fishing around in the Swiss accounts.”

The Saudi ambassador in London delivered an ultimatum to Blair that, unless the inquiry was dropped, the king would suspend diplomatic and intelligence ties with Britain. He also threatened to halt Al-Yamamah payments, which put 10,000 British defence jobs in jeopardy.

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