MI5 infiltrated the embassy, stole codes used by embassy staff for sending secret messages and planned to plant listening devices and remove documents.

The spying operation took place under the cover of restoration work that was carried out at the embassy last year.

The agent, who was given the codename Notation, has confessed his role in the operation to the embassy. It is likely that the Foreign Office will now have the embarrassing task of explaining the espionage operation to its ally.

The Official Secrets Act prevents The Sunday Times from identifying the country concerned, but its leader has visited Tony Blair in Downing Street and Britain has declared it a staunch ally.

Notation arranged for MI5 to have unrestricted access to the embassy, where he was in charge of the restoration project which began in 2001.

MI5 took detailed plans and photographs of the building and worked out how to plant bugs in the internal telephone system and inside a closed-circuit television camera in the office of a diplomat. One MI5 officer pretended to be carrying out a search for hazardous materials to gain access to secure areas.

Notation received tens of thousands of pounds in cash in brown envelopes from MI5 in return for his help. He was told not to bank the money to avoid arousing Inland Revenue’s curiosity.

He was given instructions by an MI5 handler called Claire, who told him the spying operation had been authorised at “the highest level” and warrants had been signed by David Blunkett, the home secretary.

Notation eventually quit the job, saying he was concerned that the operation was badly run and feared he could be in danger. He said he could not cope with the stress.

The Sunday Times has established he was once sectioned under the Mental Health Act and spent a year in the Priory clinic, a fact that MI5 had overlooked when vetting him.

Notation has now written to Ann Taylor, chairman of the parliamentary intelligence and security committee, drawing her attention to what he says was MI5’s bad tradecraft, which he alleges jeopardised the operation. He has delivered the same letter to the American embassy in London and to the embassy that was the target of the spying.

In the letter, he claims the ineptitude included an MI5 employee going into the foreign embassy using two different identities; an MI5 officer wearing her security service badge in the street; and another taking notes in public in a police notebook.

Even his initial approach to MI5 nearly failed because the service did not return his call to its informants’ hotline.

Notation was prompted to contact the security service when he realised he could get it access to archives of documents inside the embassy, including some marked “confidential”.

When his approach to MI5 failed he called the CIA headquarters in the United States, which put him in touch with Scotland Yard’s anti-terrorist branch.

At one stage, after infiltrating MI5 agents into the building, and being asked to “break” the embassy telephone system so that it could be “repaired”, Notation was asked to arrange for the confidential documents to be taken away under the pretence that they were being pulped.

MI5 also planned to plant listening devices in the offices of the army, navy and air attachés and in rooms they used for secret conferences.

Notation began to suffer from the stress of the deception, which was made worse when his MI5 handler told him that failure was not an option.

The political and diplomatic consequences of the discovery of the spying mission would be “cataclysmic”, he was told. “You are in no immediate physical danger,” his MI5 handler told him.

“It got to the stage where I feared for my safety,” he said. “If I had been caught I was convinced MI5 would have disappeared and denied everything, leaving me to take the blame.”

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