BRITAIN'S top spies knew that the ringleader of the London bombers was planning to fight for Al-Qaeda more than a year before the July 7 suicide attacks, security sources have revealed.
MI5 bugged Mohammad Sidique Khan and Shehzad Tanweer, a second bomber, for two months as they talked about Khan's desire to fight in what he saw as the Islamic holy war.
Agents also listened in as the men talked between themselves about Khan's plans to return to Pakistan where he had attended a camp for British terrorists. They also spoke about engaging in crime to raise money for Islamic extremism.
However, police and MI5 officers ruled that the two men were not an "immediate risk" and did not present a "direct threat" to national security.
The detectives' assessment was that the men were primarily involved in fraud rather than preparing to mount attacks in the near future. As a result, surveillance on them stopped, allowing the attacks that killed 52 people and injured 700 to go ahead.
Security sources said that the disclosures come from a trawl by officials of MI5 files on all intelligence held on the four bombers.
The agency has traced the origins of the July 7 plot back to the summer of 2003 when Khan visited a terrorist training camp in northern Pakistan. It has established that the camp was set up by Al-Qaeda soon after Tony Blair sent British troops into Iraq.
The aim of the camp, security sources say, was to train would- be terrorists such as Khan to plan and carry out bomb attacks in Britain. A source said that when Khan returned from the camp in the summer of 2003 he was fully versed in how to make bombs.
The intelligence agency should have picked up the early warning signs about Khan and Tanweer's intentions as they travelled together around England during 2004.
The disclosure is expected to lead to renewed calls for a public inquiry into the July 7 attacks and the potential intelligence failings. Last month Blair ruled out in inquiry, saying it would distract from the task of fighting terrorism. Instead the government is to publish an official "narrative of events" leading up to July 7.
Charles Clarke, the home secretary, said at the time of the bombings that they had "simply come out of the blue". Security officials said the suicide bombers were "clean skins" - men not previously known to the intelligence services.
Two weeks after their denials, intelligence officials admitted that they knew at the time that Khan was "on the fringes" of terrorist activities. Officials said that hundreds of others had been in a similar situation, adding that they had made a "quick assessment" and ruled that Khan was not an immediate threat to national security.
The new evidence, uncovered in the trawl ordered by the Home Office of all relevant documents at Scotland Yard and MI5, shows the intelligence services knew far more about Khan and Tanweer than the government has publicly admitted.
A senior Whitehall official, defending the intelligence services last week, said that with hindsight, and the discovery of new evidence about the suicide bombers, MI5 had changed its view of them.
Hundreds of pages of transcripts obtained from the surveillance are contained in secret files being prepared by MI5 and Scotland Yard. Clarke has asked for the files to be collated so the government can prepare the official narrative of events.
Members of the parliamentary intelligence and security committee, which is holding a confidential inquiry into the intelligence agency's handling of the attacks, have also been briefed on the findings.
This weekend Rachel North, an advertising executive from north London who was injured in the King's Cross bombing, said: "This is a compelling reason why we need a full public inquiry. The public has a right to know what the risks were and why this happened."
Patrick Mercer, the Tories' homeland security spokesman, said: "We need the government to reveal the full details of what it knew of the threat at the time. This absolutely underlines the need for an independent inquiry."
MI5 has now established that Khan travelled to other camps in Pakistan in the summer of 2003 and may well have visited Afghanistan. His and Tanweer's last known visit was in November 2004, according to immigration officials in Pakistan.
MI5 has calculated that the entire plot cost less than £10,000 to carry out. It has also employed a team of in-house psychologists to analyse why the four men became terrorists.
Khan, who was 31 when he blew up himself and six others at Edgware Road Tube station, had been working as a learning "mentor" in a primary school in Leeds. Tanweer, 21, blew himself up at Aldgate station, killing eight others.
When the files go to Clarke they will be reviewed by William Nye, the new director of counter-terrorism and intelligence at the Home Office. He will advise Clarke on how much of the intelligence material on the four bombers should be made public in the narrative of events. It is expected to be complete by the spring.