An inquiry looking into allegations of UK security agencies' involvement in torture is to probe revelations that British Security Services may have traded secrets with Libyan intelligence during the era of the so-called war on terror.
Documents found last week in Tripoli allege that British security services colluded with the Gaddafi regime over the locations of Libyan dissidents while Tony Blair was in power.
The inquiry is headed by Sir Peter Gibson, a judge who also serves as the intelligence services commissioner. His investigation, which is due to start by the end of the year, was set up by the coalition government, and will investigate Britain's role in 'extraordinary rendition' - the movements of terror suspects on secret flights by the CIA.
British Prime Minister David Cameron confirmed the investigation on Monday saying it was important the allegations were looked into properly.
"Significant accusations have been reported today that under the last government relations between the British and Libyan Security Services became too close, particularly in 2003," he told the house of commons in a statement.
He added that there must be "no pampered hiding place from justice" for Colonel Gaddafi and vowed Nato would continue its military campaign for as long as needed.
On Sunday it emerged that documents retrieved by Human Rights Watch from Colonel Gaddafi's former intelligence chief revealed embarrassingly close ties between the regime and western intelligence services.
The documents suggest that Britain may have been involved in the rendition of Libyan terror suspects including Abdul Hakim Belhadj, now a commander in the rebel forces which overthrew Gaddafi with UK support. Belhadj is reported to be demanding an apology from London for its involvement in his 2004 rendition and subsequent imprisonment, during which he says he was tortured.
According to one of the documents found, MI6 dispatched an intelligence officer to Tripoli after Belhadj's detention to obtain information of "urgent importance" from him relating to UK anti-terrorist operations. At the time, he was a member of the Libyan Islamic Fighting Group, which was affiliated to al Qaida.
The Labour MP Jack Straw, who served as Foreign Secretary during the time of the alleged collusions, told BBC Radio 4 on Monday afternoon: "These allegations must be examined. No foreign secretary can know all the details of what their intelligence agencies are doing at any one time and that's why it's important these allegations are examined by Sir Peter Gibson's independent inquiry."
But human rights group Liberty has said there are serious concerns the Gibson inquiry will not be a transparent process, and that the cabinet secretary will decide which information is released to the public.
"It is a more like an internal Cabinet Office review than a public inquiry with no participation for the torture victims and the government not sir Peter having the final word on what is and is not published," Shami Chakrabarti, director of Liberty, said.
"We urge the government to understand the gravity of what happened under the last administration and to think again whilst there is still time to rescue Britain’s reputation in the worldS
A spokesperson added that the latest revelations from Libya were "horrendous" and likely to be credible as they came from a believable source.
The documents were found in the offices of Moussa Koussa, Gaddafi's former right-hand man who has since defected. They also implicate the CIA in the rendition of suspects to the Libyan security forces, and suggest that MI6 gave the Gaddafi regime details of Libyan dissidents.
Koussa, Libya's spy chief before he became Foreign Minister is suspected by human rights groups of involvement in the torture of Libyan prisoners; the British Government came under pressure to arrest him when he defected to the UK earlier this year. He has since moved to Qatar.
The files are believed to originate from a period of rapprochement between Gaddafi and the West, with Tony Blair instrumental in bringing the despot back into the international fold.
"We stumbled across a room containing the files," said Peter Bouckaert, Director of Human Rights Watch. "These documents we found, their faxes start off 'Dear Moussa, thanks for the oranges you sent us, they were delicious'."
One document contains information on Blair's 2004 meeting with the now deposed leader, suggesting it was Downing Street's idea to hold the conference. There is even evidence that MI6 drafted a political speech for Colonel Gaddafi during a period of cosying between the UK Government and the regime.
The findings, which have not been independently verified, will also make damning reading for the CIA, with claims that the US used Libya as a base for the rendition of prisoners, allowing the interrogation of suspects outside conventions on human rights.