Tony Blair today warned that an investigation into a £40 billion arms deal with Saudi Arabia would lead to the “complete wreckage” of vital British national interests.

The Prime Minister - attending the G8 summit in Germany - was facing demands for a new inquiry into the al-Yamamah deal, signed in the 1980s, amid reports that hundreds of millions of pounds were secretly channelled to a Saudi prince.

The BBC said that more than £1 billion was paid into accounts controlled by the former Saudi ambassador to the US, Prince Bandar bin Sultan, over a period of at least a decade.

Last year, there was an outcry after the Attorney General shut down a corruption inquiry by the Serious Fraud Office into the al-Yamamah deal.

Today, as new details emerged of alleged secret payments, calls grew for a further inquiry. Sir Menzies Campbell, the Liberal Democrat leader, said that Mr Blair had accepted responsibility for the end of the SFO inquiry. “I think that we need some sort of statement from the Prime Minister on this,” he said.

But Mr Blair was defiant, insisting that it had been right to halt the SFO investigation, for fear that the Saudis would end co-operation on intelligence and security matters.

“This investigation, if it had gone ahead, would have involved the most serious allegations and investigation being made of the Saudi royal family,” he said.

“My job is to give advice as to whether that is a sensible thing in circumstances where I don’t believe the investigation would have led to anywhere except to the complete wreckage of a vital interest to our country.”

He said the fight against terrorism would have been harmed and thousands of British jobs lost.

The al-Yamamah deal to supply the Saudis with more than 100 Tornado and Hawk warplanes was originally agreed by Margaret Thatcher’s Conservative government in 1985.

The payments were said to have been made by BAE Systems, the UK’s biggest arms manufacturer, with the full knowledge of the Ministry of Defence.

According to a BBC Panorama investigation, BAE secretly paid up to £120 million a year on a quarterly basis into two accounts in Washington, over a ten-year period. The payments were said to have been written into secret annexes of the Al Yamamah contract for the provision of “support services”, and authorised by the MoD.

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