Tony Blair today admitted that he had urged the Attorney-General to drop a sleaze inquiry against the Saudi Government because a prosecution would have done "immense damage" to Britain.
The Prime Minister said that he took full responsibility for the decision to drop the Serious Fraud Office inquiry into bribery allegations involving arms manufacturer BAE Systems.
Speaking after a summit of EU leaders in Brussels, Mr Blair brushed aside suggestions that he had caved into pressure from the Saudi Arabian Government that would leave Britain vulnerable to "blackmail" from other regimes considered important to the country's security and employment interests.
Abandoning the inquiry is expected to save a multi-billion pound jet fighter contract but Mr Blair insisted that his main concern was not to jeopardise anti-terror co-operation form Riyadh.
His spokesman said that the Saudis gave valuable information on al-Qaeda, Osama bin Laden and most of the 9/11 terrorists come from the desert country.
Mr Blair said: "This is a very important issue for our country. Leave aside the effect on thousands of British jobs and billions worth of pounds for British industry, leave that to one side.
"Our relationship with Saudi Arabia is vitally important for our country in terms of counter-terrorism, in terms of the broader Middle East and in terms of helping in respect of Israel-Palestine - and that strategic interest comes first.
"If this prosecution had gone forward all that would have happened is we would have had months, perhaps years, of ill-feeling between us and a key ally.
"I'm afraid, in the end, my role as Prime Minister, is to advise on what's in the best interests of our country. I have absolutely no doubt at all that the right decision was taken in this regard and I take full responsibility.
"I have no doubt at all that had we allowed this to go forward it would have done immense damage to the true interests of this country. And leaving that aside that fact that it would have lost thousands of highly-skilled British jobs and very important business for British industry."
Mr Blair's spokesman added later that Lord Goldsmith, the Attorney-General, has said in his statement on the decision that the prospect of a successful prosecution was unlikely "even with further investigations."
The investigation had embarrassed the Saudi royal family, on whom the alleged £60 million bribes were supposed to have been spent, and threatened a new £10 billion defence deal awarded to BAE by the Kingdom.
Shares in BAE Systems, Europe's largest defence company, rocketed by nearly 6 per cent from 397.25 to 420.25 pence each by mid-morning, as news that the investigation had been dropped filtered through to the stock market.
Investors had feared that the probe would jeopardise BAE's planned £10 billion sale of 72 Eurofighter Typhoon jets to Saudi Arabia, dubbed "al-Yamamah II" after the series of UK arms sales to Saudi Arabia that began in the 1980s. BAE stock fell to 384.50 pence a share at the beginning of December, as reports emerged that Saudi Arabia had given Britain ten days to halt the investigation or risk losing the contract to a French rival.
The Eurofighter programme is worth an estimated 30p a share. Analysts at investment banks UBS and Merrill Lynch responded bullishly, predicting that the share price will recover and recommending that investors buy BAE shares.
Shares in Rolls-Royce, also a member of the Eurofighter consortium, went up by 2p this morning.
BAE has been under fire for allegedly setting up a slush fund to bribe Saudi officials and businessmen during the 1980s but it has consistently denied any wrongdoing.
The alleged bribes from Britain’s prime defence contractor were part of the £40 billion al-Yamamah contract for BAE to supply the Royal Saudi Airforce with 200 Tornado fighter jets.
The Saudi royal family was understood to be furious that the SFO has been allowed to rake through the al-Yamamah deal and embarrass senior members who were involved in the procurement.
The Saudis threatened to cancel a £10 billion agreement signed with the British Government and BAE only three months ago. This deal will lead to BAE supplying the Saudis with 72 Typhoon Eurofighters and the total value of the contract could be worth as much as £20 billion over the 20-year life of the programme.
Mr Blair backed the Ministry of Defence in its demands to shut down the SFO investigation as fears grew that the case would alienate the Saudis.
However, critics claim that domestic political considerations and the need to safeguard jobs at BAE are the real reasons for dropping the case. The Saudi Typhoons will keep BAE’s Wharton factory in Lancashire, which employs over 9,000 people, operating at full capacity until 2014.
Yesterday's decision has prompted criticism from opposition politicians.
Lord Goodhart, the Liberal Democrat constitutional affairs spokesman, said that the Government had effectively succumbed to "blackmail" by the Saudis.
Lord Goldsmith told the House of Lords yesterday that the SFO would have needed a further 18 months to complete its investigation into BAE with no certainty of being able to make a case.
He said that he had spoken to the Prime Minister and the heads of the intelligence services and concluded it was in the national interest to stop the investigation.
However Lord Goodhart said it was clear the decision had been forced on Mr Wardle by ministers.
"We were told yesterday that there had been discussion the day before with the SFO. The director of the SFO was given the night to think about it and came back yesterday morning and agreed," he told the BBC Radio 4 Today programme.
"So it’s clear that it was not the SFO’s own decision. It was not instigated by the SFO. This came from the top."
He said it appeared that ministers also come under pressure from the Saudi government.
"If there is a belief that further investigations into BAE Systems would have provoked the Saudi response of cutting off communications on intelligence and security issues, then that can only come from statements by the Saudi government," he said.
David Lee, who was assistant director of the SFO from 1989 to 1991, also expressed concern about the way the inquiry had been dropped.
"It seems to me a very unusual thing to happen. I have certainly never seen it before," he told the Today programme.
"The timing is rather unfortunate next to the lobbying that has been going on. We could all do with more detail on the reasons.
"Additionally we have some concerns...is the right message being sent about the attitude to the potential for corruption and in particular what kind of precedent might be being set for other cases which are being investigated?
"Indeed, are we actually seeing interference by political or diplomatic factions in the judicial and investigatory process?"
Norman Lamb, the Liberal Democrat MP who has followed the case closely, said: "If ever there was a final nail in the coffin of this government’s reputation this is it. Coming a fortnight after the
Typhoon threat from the Saudis this destroys Britain’s reputation for good governance."
Sir Menzies Campbell , the Liberal Democrat leader added: "The Attorney General has a responsibility not just to government but to the public interest.
"This is a decision with enormous constitutional implications which will have established a damaging precedent.
"It is a sorry day for Britain’s reputation, and the next time we try to assert the rule of law in other circumstances, people will question our sincerity."
