An intimate telephone conversation between Diana, Princess of Wales, and her close friend, James Gilbey, which found its way into a tabloid newspaper, may have been recorded by GCHQ, the Government’s secret communications agency, the inquest into her death heard yesterday.

So embarrassing was the conversation, known afterwards as the Squidgygate tapes, that the Queen ordered MI5 to conduct an investigation into the phone-tapping, it was alleged.

Former inspector Ken Wharfe, who worked as police protection officer for the Princess and her sons from 1987 to 1993, told the hearing that he believed that the Princess and other members of the Royal Family were under regular surveillance because of heightened IRA activity. But under cross-examination, he admitted that this was merely an assumption on his part and he had no evidence for his claim.

The Princess made the call from Sandringham on a landline to Mr Gilbey’s mobile on New Year’s Eve in 1989. When a transcript was published in a national newspaper in 1992, John Major, then Prime Minister, issued a statement denying that the security services had recorded the call.

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Mr Wharfe, like others before him, was unable to explain how the conversation was then picked up by two amateur radio operators living in Oxfordshire.

Although lacking factual backing, Mr Wharfe’s allegations, first made in a book he published on his life with the Princess, were grist to the mill of Mohamed Al Fayed, who maintains that she and his son, Dodi, were killed in a car crash masterminded by the Duke of Edinburgh and carried out by the security services.

“You are the first person to say that there is a possibility that GCHQ was involved,” Michael Mansfield, QC, for Mr Al Fayed, told Mr Wharfe with some relish. Mr Mansfield told the court that he had been trying without success to get GCHQ to say whether it had taped the call. He asked Lord Justice Scott Baker, the coroner, to discover whether any report existed on the investigation that the Queen is alleged to have ordered.

Mr Wharfe told the hearing that the Princess had confirmed to him that she was the woman on the tape. She even rang a phone line set up by the newspaper to listen to it herself.

During his time working for the Princess he had never heard her make any derogatory remarks about the Queen or the Duke of Edinburgh, whom she described as “a surprisingly supportive father-in-law”. But, according to Mr Wharfe, she was annoyed that the Queen appeared to disapprove of her association with Aids and leprosy charities. Mr Wharfe told the inquest that the Queen distressed the Princess, who visited victims of leprosy and Aids, by asking her to do “something more pleasant” with her charity work.

By the time of the Princess’s death, Mr Wharfe had been transferred to other police duties because, it was claimed by his superior officer at the time, she had ceased to trust him and suspected that he was briefing the media behind her back. Mr Wharfe said that he had been moved at his own request.

Asked about the night of the fatal car crash in 1997, by which time the Princess was no longer his responsibility, Mr Wharfe strongly criticised the Fayed private security team who were supposed to be looking after her. They had made the mistake of alienating the paparazzi gathered round the Ritz Hotel and treating them as the enemy. He said that the media had no motive to cause harm, but press and security relations had become problematic by the end of August 1997.

The hearing continues.

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