MI5 judged that Abu Hamza, the cleric jailed for inciting his followers to murder westerners, was just a “harmless clown” who had the right to express himself, according to one of its former agents.

Reda Hassaine, an Algerian who was paid by MI5 to spy inside the Finsbury Park mosque in north London, says his handler, whom he knew only as Steve, told him that Hamza and other militants had the right to a roof over their heads in Britain, even if they had carried out murders in other countries.

Hassaine was an agent for MI5 and Scotland Yard’s Special Branch for 16 months from July 1999 to November 2000, a period when Hamza was in control of the mosque. It was not until October 2004 that Hamza was charged with soliciting murder and inciting racial hatred. He was jailed for seven years last week.

Hassaine said MI5 told him that it was “not interested” in prosecuting Hamza for such offences.

“I told them Abu Hamza was brainwashing people and sending them to terrorist training camps in Afghanistan, that he was preaching jihad and murder and that he was involved in the provision of false passports. I told them he was a chief terrorist,” Hassaine said.

“The MI5 officer told me Abu Hamza was harmless and that MI5 thought he was a clown.”

Hassaine said he even offered to wear a small camera and recording device while he was inside the mosque talking to Hamza and fellow militants. “They told me not to bother, that they weren’t interested.”

Police formally asked prosecutors to consider charges against Hamza in March 1999 and June 2003. But the files that Scotland Yard submitted focused on suspected links between Hamza and Yemeni terrorists.

The Yard did not send any copies of inflammatory speeches by Hamza and even handed back those they had seized in 1999 in their Yemen inquiry.

Hassaine, who has asked lawyers to examine whether he has grounds to sue MI5 and the Metropolitan police for physical and mental damage, has detailed diaries of his monthly meetings with MI5, including his evidence and his handler’s reactions.

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