The multi-million pound prosecution of a local newspaper journalist and the police source who "leaked" stories to her collapsed today after evidence gathered against them in a police bugging operation was declared inadmissible.

The 18-month-long case and investigation, monitored at senior levels in Whitehall, was thrown out when a judge ruled that police surveillance and search operations mounted to identify the reporter's sources were a violation of human rights.

Judge Edward Southwell ruled there was nothing in the information allegedly leaked to Sally Murrer, a part-time reporter on the Milton Keynes Citizen, by Mark Kearney, a former detective sergeant, which touched on national security or serious crime and, therefore, the intrusive investigation by Thames Valley Police was unjustified.

The case has direct parallels with the investigation into Home Office leaks which led yesterday to the arrest of Conservative shadow minister Damian Green. Mr Green was detained on suspicion of aiding and abetting misconduct in a public office, the same offence with which the reporter was charged.

Mr Green's home and office were searched by counter-terrorism officers from the Metropolitan Police while Miss Murrer was arrested three times, held overnight in cells and strip-searched as part of an operation by Thames Valley constabulary likened by her lawyers to the actions of the secret police in an authoritarian state.

The prosecution was on a Government list of sensitive cases after Mr Kearney came under the spotlight last year as the police intelligence officer who recorded prison conversations between a Labour MP and a terror suspect.

That disclosure was part of his defence case, intended to show that he had been party to but did not leak sensitive information, and did not form any part of the charges against him.

But his role as a covert policeman in Woodhill high security jail meant the case against him was being kept under review at senior levels in the Crown Prosecution Service, the Home Office, the Police Service and the Ministry of Justice. All those departments now face questions about how such a case came so close to trial despite the evidence having been gathered in blatant breach of British and European law.

The judge rejected the evidence in the case in a judgment on Tuesday then, bizarrely in a case involving press freedom, barred the media from reporting it until the Crown considered whether or not it wanted to appeal. Sir Allan Green, QC, prosecuting told the court today that he would offer no evidence against the defendants and the charges were dismissed.

The judge found that although there appeared to be evidence of Mr Kearney passing confidential information to Miss Murrer, there was a huge amount of British and European law which afforded them protection as a journalist and source.

The judge said: "In many ways it's a startling ruling for me, sitting as a judge in a Crown Court every day, to be forced to." But he said he was "effectively bound" by rulings in Britain and across Europe in cases where states had used heavy-handed methods to try and prosecute reporters.

The decision to drop the case means all charges against Miss Murrer and Mr Kearney have been dropped. So too are related charges against Derek Webb, 53, a former policeman and friend of Mr Kearney's who worked as a private detective and passed stories to the News of the World and other newspapers. A single charge against Mr Kearney's son Harry, 21, a British Army sapper, was also dropped.

Ms Murrer was interviewed under caution on seven occasions. The home where she lives with her three children was searched by eight Thames Valley police officers while another four searched the newspaper office where she works three days each week. She placed her daughter in a boarding school after being told by police she was going to jail.

Mr Kearney had a listening device placed in his car and was the subject of surveillance for a long period. His health deteriorated sharply during the case and he had to be taken from court to hospital last week.

Ms Murrer's defence team argued successfully that her right to freedom of expression under article 10 of the European Convention of Human Rights had been violated.

Gavin Millar QC told the court: "The measures used by Thames Valley Police against Sally Murrer are familiar in authoritarian states where the police are used to discourage the media from reporting on issues of public interest using confidential sources. Thankfully, because of article 10, they are almost unheard of here. This case is, sadly, a rare exception to the rule."

Mr Millar argued that under domestic and European law, journalists were entitled to protection for themselves and their sources when discussing confidential information. That was compromised where there were issues of national security or danger to the public involved.

But in Ms Murrer's case she had been discussing a local case about which police had given a press conference, an incident in which an MK Dons footballer was involved in a brawl at a disco, and information about a young prisoner about which she did not write a story.

Mr Millar argued that the correct course of action to attempt to get a journalist to disclose a source was to seek an order in the civil courts.

Instead, Thames Valley had begun an investigation, codenamed Operation Plaid, aimed at trapping Mr Kearney and any journalists he might have spoken to.

Mr Millar said: "Operation Plaid was an attempt by the state to discover the identity of journalistic sources using the coercive powers of one of its law enforcement agencies. This is extremely unusual."

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