A man was being held in connection with an investigation which hardline Unionists claimed was further evidence of the IRA’s continuing activity and Sinn Fein’s unsuitability for government.

The man, who is being questioned over suspected terrorist offences, was one of two arrested on Thursday. The second was released without charge yesterday.

Both are believed to be employees at the Northern Ireland Police Fund in Maryfield, Co Down, where they are believed to have had access to files on serving and retired police officers, including their addresses and other personal details. The news is a major blow to hopes of restoring the Province’s power-sharing government and was seized upon last night by the Rev Ian Paisley’s Democratic Unionist Party, which is now the largest Unionist grouping after defeating David Trimble’s Ulster Unionists in last week’s Assembly election.

Jeffrey Donaldson, the hardline Ulster Unionist MP for Lagan Valley, said last night that he was “very deeply concerned about the possible breach of security at the police fund”.

He said: “It’s another incredible lapse of security and I will be calling in Parliament for the Secretary of State and the Security Minister for Northern Ireland to take urgent action and to carry out a review of vetting procedures for staff in all public bodies.”

He added: “This latest incident demonstrates why Sinn Fein is unfit to be in the government of Northern Ireland and shows the republican movement’s continuing terrorist activity.”

The affair, which is hugely embarrassing for Sinn Fein, appears similar to an alleged spy ring operated by the IRA inside the Northern Ireland Office. The exposure of the spying operation led to the collapse of devolution in the Province in October last year, and a breakdown in trust between Unionists and republicans.

Security sources said last night that they were seeking to establish exactly what had been taken from the police fund and whether this had ended up in the hands of the Provisionals.

“We’re looking to see whether some documents may have found their way into the hands of terrorists,” said one security official. “We’re talking about these people having access to all sorts of files and all sorts of records.”

Security sources last night linked the security breach to the Provisionals’ sophisticated intelligence department, allegedly run by a West Belfast former IRA prisoner called Bobby Storey.

The police fund, which was set up to provide assistance to serving and former police officers under the Patten reforms, confirmed yesterday that it had suspended two members of staff.

Its board of trustees was understood to be meeting last night to discuss the severity of the security breach.

Although many observers will not be surprised by the latest indication of continuing IRA misbehaviour, it could hardly have come at a worse time for both the British and Irish governments, which are desperately seeking to broker a deal that will enable devolution to be returned to Stormont.

The news will almost certainly strengthen the DUP’s determination not to share power with republicans.

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