Nazi forgers succeeded in flooding Europe with fake British bank notes, "destroying" confidence in the UK currency, according to secret MI5 files made public today.

Papers released by the National Archives show that by the end of the Second World War the forgeries were so rife, British bank notes would not be accepted on the Continent.

The Germans first began forging the notes in 1940 in preparation for Hitler's planned invasion of Britain, according to a report drawn up in 1945 by Sir Edward Reid of MI5's section B1B.

According to a captured German agent, the plan was to scatter the notes over the country from the air "in order to create loss of confidence and general confusion".

Although Hitler was forced to abandon his invasion plan after the failure of the Luftwaffe to gain aerial supremacy in the Battle of Britain, the German forgers carried on perfecting their techniques to devastating effect.

"What they subsequently produced was a type of forgery so skilful that it is impossible for anyone other than a specially trained expert to detect the difference between them and genuine notes," Reid reported.

Initially the fake notes were circulated in neutral Portugal and Spain with the double objective of raising money for the Nazi cause and creating a lack of confidence in the British currency. Subsequently they began turning up as Egypt as well.

By 1944, the British authorities were so alarmed at the impact they were having, they informed the Spanish government who seized £20,000 in British notes from German agents - all of which turned out to be forged.

However, the practice backfired on the Germans when it turned out that agents being sent to spy on Britain were being issued with the fake notes, quickly alerting the UK authorities to their presence.

"There is thus the diverting picture of one department of the German Secret Service selling forged notes in Lisbon, and another department of the German Secret Service buying them in the belief that they were genuine in order to give them to agents being sent to this country," Reid noted.

At first few of the fake notes reached Britain, but all that changed after D-Day and the invasion of France in 1944 when they began appearing in large numbers - largely due to the black market activities of Allied troops.

"It turned out that what was common was the selling of Army stores on the French black market and the using of the francs so received to buy British notes to send or smuggle home," Reid wrote.

"A good deal of undesirable activity took place in this way, and although British troops undoubtedly did their share, it appears that American and Polish troops were both more active and more adept in this line."

Although a number of successful prosecutions did have a deterrent effect, Reid admitted that by the end of the war the German forgers had achieved their aim - even if it came too late for Hitler and the Third Reich.

"In general it can be said that the German object of destroying confidence abroad in Bank of England notes has been achieved," he wrote.

"At present no one will accept a Bank of England note in any neutral country of Europe except at a very large discount and it is difficult to see how the authorities in this country can deal with the situation and restore confidence in the British currency except by calling in all the outstanding Bank of England notes of denomination of £5 and over and making a fresh issue."