As Liam Wray is showing me around the Museum of Free Derry in the heart of the Bogside, we arrive at a glass case containing a rumpled brown corduroy jacket. Wray’s older brother, Jim, 22, was wearing it at the civil-rights march on January 30, 1972, when he was among the 13 unarmed Catholic demonstrators killed by soldiers of the Parachute Regiment. He was running for his life when a high-velocity rifle round smashed into his spine, knocking him down. One eyewitness recalled seeing Wray raise his head, then say: “Help me, I can’t move my legs.” Another told him: “Don’t move. Pretend you’re dead.” Moments later he was shot again at close range, the bullet entering his back before tearing through his thorax.

The jacket was returned to the Wray family after a postmortem, and it became a treasured possession, produced occasionally for inspection by journalists writing about Bloody Sunday and its aftermath. After Tony Blair’s announcement in 1998 that there would be a new inquiry – chaired by Lord Saville of Newdigate, with two senior Commonwealth judges assisting him – the family handed the jacket over for forensic examination. It was subsequently donated to the newly opened museum, still bearing the bright yellow tags attached by inquiry staff to mark the bullets’ entry points.

“What you are looking at is evidence of the murder of a British citizen by a British soldier in a British city,” says Liam Wray, a lean, articulate man in his mid-fifties who has been closely involved with the long and often painful campaign by families of the Bloody Sunday dead to secure justice for their loved ones. “My view has always been that Jim was a human being and as such had a right to live. If nobody is ever held to account for killing him, that tells me the law considers my brother as something less than human, whose death was of no significance.”

As we talked, a party of students from Hungary came into the museum, some flinching as a recording made during the march broadcast the screams of panicking demonstrators and the unmistakable crash of gunfire. There were gasps as they read the label on a case containing the bloodstained Babygro with which a frantic woman had tried to staunch the stomach wound that killed 17-year-old Michael Kelly.

Closure is not a word Wray much likes, but as he points out, without Saville’s inquiry, the only historical verdict on how Derry’s sons, fathers and husbands died would have been the hasty and demonstrably flawed investigation carried out a few weeks later by Lord Widgery, then Britain’s lord chief justice. Suddenly animated, he tells me: “That man took less than three months to clear all the Paras by ruling that they had opened fire only after coming under attack by IRA gunmen. His report ran to just 36 pages, and we’ve been waiting 36 years for the truth.”

From day one of the public hearings held in Derry’s ornate Victorian Guildhall, the Bloody Sunday inquiry has served as a cash cow for the army of solicitors and barristers involved. Official figures show that legal costs have swallowed more than half of the £181m spent up to the end of last year. The senior QCs alone have pocketed well over £20m, and the gravy train is still rolling. The final bill for Saville’s seemingly interminable investigation – which heard its last witness three years ago but continues to cost around £500,000 per month – seems certain to exceed £250m and could reach £400m, according to government sources, after the last of the lawyers’ invoices are settled.

Number-crunchers in the Tory party seized gleefully on the top end of the estimates, claiming that this kind of money would pay for an extra 5,000 nurses, 600 doctors, 11,000 police officers or a dozen Apache helicopter gunships in Afghanistan. The head of the Police Service of Northern Ireland, Sir Hugh Orde, may have had this in mind when describing the inquiry as “a huge money-sucking venture” (though he later “clarified” his remarks). The widely respected former ombudsman for Northern Ireland, Dr Maurice Hayes, believes the vast amounts spent on an inquiry unlikely to unearth “the essential truth” of what happened could have been put to much better use for the bereaved families. Derry’s firebrand political activist Eamonn McCann, who helped to organise the civil-rights march in 1972 and is now chairman of the Bloody Sunday Trust, is particularly scathing about the “legal feeding frenzy”. “It’s obscene that taxpayers may be funding some wealthy lawyer’s new yacht or buying him a better holiday home,” he told The Sunday Times Magazine. Yet McCann still backs Saville in his quest, “however long that may take him and whatever it costs”.

What makes Saville’s inquiry unique, McCann argues, is that unlike so many of the sectarian atrocities committed during the Troubles in Northern Ireland – assassinations on lonely back roads, bombs in crowded bars – the killings occurred in a public place in broad daylight before a huge crowd. “Every shooting was witnessed by scores of people, many of whom knew the victims personally. That’s why the inquiry has taken this long: there were so many witnesses who wanted to be heard but had been ignored by Widgery.”

When I asked Jonathan Powell, Tony Blair’s former chief of staff and invaluable point man in Northern Ireland, about the huge expense of the inquiry his former boss set up, he grimaced theatrically. At the time, nobody dreamt it was going to drag on for years, he said. “Labour had been out of government for so long, there was nobody around with much experience of public inquiries. We’d forgotten how rarely they actually resolved deep-rooted problems, and how often they came back to bite you.”

As it became clear that costs were running out of control, alarm bells had started ringing in 10 Downing Street: shovelling government money into the bank accounts of prosperous lawyers was not what new Labour was about. “There were times when we looked at each other and thought, ‘What in hell have we got ourselves into here?’ ” said Powell. Blair mentioned the inquiry so rarely in public during his last years in power that his press office could not track down any reference for me.

According to Powell, the appointment of a new inquiry was by no means top of the agenda for the Sinn Fein delegation, led by Gerry Adams and Martin McGuinness, during the tough negotiations that produced the 1998 Good Friday peace agreement. “They certainly didn’t give the impression that this was a potential deal-buster,” he said. “Their main focus was firmly on prisoner releases, policing and the terms for decommissioning IRA weapons.” The most sustained pressure for reopening the case had come from the Irish government in Dublin, with strong backing from Mo Mowlam (then Blair’s Northern Ireland minister). “Mo was always nagging me to look at the Widgery report, because I would then understand why the families had been campaigning for so long.”

Powell concluded that Widgery’s “complete and utter whitewash” of the Paras greatly strengthened the case for a new inquiry. “We knew Dublin was preparing a report on the killings that trashed Widgery and would soon be made public. Tony and I both felt that a formal apology for Bloody Sunday from the British government would be enough to keep Sinn Fein on side, but the Irish wouldn’t budge. So we reluctantly shifted our position to demonstrate that this government had nothing to hide.”

Times Recommends

• Everyone will get vaccine against swine flu
• Artificial sperm and the race to build a baby
• BBC staff lavished with trips to lobby for awards