The day after Lord Goldsmith dropped his bombshell, a huddle of serious looking men in suits could be found sharing a curry lunch at an Indian eaterie in Holborn, central London.

While fellow diners were letting their hair down at raucous office Christmas parties, this group was quietly picking over an event unprecedented in recent legal and political history.

Over chicken madras and poppadoms, Robert Wardle, the director of the Serious Fraud Office, and his colleagues were trying to digest the fact that, after more than two years of hard work and £2m of public money, their most extensive criminal investigation had been summarily called off — just as they thought it was hotting up.

The long-running inquiry into alleged corruption by the arms company BAE Systems and its executives was stopped in its tracks after the attorney-general declared it was no longer in the “national interest”.

Persisting with the investigation, Goldsmith said, risked seriously damaging Britain’s relationship with Saudi Arabia and jeopardising the war on terror in the Middle East. The prime minister and the defence secretary, Des Browne, agreed.

If the men from the SFO felt the need for a recuperative curry after Thursday’s extraordinary announcement, the attorney-general himself could have been forgiven for craving something stronger. For the past fortnight he has been burning the midnight oil trying to find a way out of the desperate conundrum posed by an ultimatum from the Saudis: drop the investigation or we take our business elsewhere.

A source close to the attorney-general said: “He was between a rock and a hard place. Whatever he did he was going to get flak. If he intervened, he’d be accused of putting business before the rule of law; if he didn’t, tens of thousands of people would lose their jobs. He was damned if he did and damned if he didn’t.”

Small wonder Goldsmith looked so uncomfortable as he announced his decision to a near empty House of Lords on Thursday afternoon, long after most MPs next door had left London for their constituencies.

Aides say he had been forced to rush out his statement because it was in danger of leaking and he had not even had the chance to rehearse the words. “It was a horrible day,” said one aide. “The announcement was incredibly commercially sensitive so it had to be made after the markets had closed. Plus it was leaking, who knows from where. He was forced to act very fast.”

His announcement was greeted with howls of protest. Clare Short, the former Labour cabinet minister, labelled the government “even more soiled” than she had thought, and said Goldsmith’s decision suggested BAE was “above the law”.

By Friday, Tony Blair’s official spokesman was on the rack, fending off a barrage of hostile questions from the Westminster press lobby. The usually sure-footed Tom Kelly got himself in a twist when he apparently conceded that the “impact on jobs” had been a consideration — directly contradicting the attorney-general’s statement on Thursday.

Critics pointed out that it was unprecedented for an attorney-general to halt an inquiry while investigators were still digging.

Goldsmith’s supporters replied that taxpayers would complain if the SFO wasted another 18 months on an investigation that he had become convinced was going nowhere.

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