Tony Blair warned that an investigation into a £40 billion arms deal with Saudi Arabia would lead to the “complete wreckage” of vital British national interests.

The Prime Minister - attending the G8 summit in Germany - was facing demands for a new inquiry into the al-Yamamah deal, signed in the 1980s, amid reports that hundreds of millions of pounds were secretly channeled to a Saudi prince.

The BBC said that more than £1 billion was paid into accounts controlled by the former Saudi ambassador to the U.S., Prince Bandar bin Sultan, over a period of at least a decade.

Last year, there was an outcry after the Attorney General shut down a corruption inquiry by the Serious Fraud Office into the al-Yamamah deal.

Today, as new details emerged of alleged secret payments, calls grew for a further inquiry. Sir Menzies Campbell, the Liberal Democrat leader, said that Blair had accepted responsibility for the end of the SFO inquiry. “I think that we need some sort of statement from the prime minister on this,” he said.

But Blair was defiant, insisting that it had been right to halt the SFO investigation, for fear that the Saudis would end co-operation on intelligence and security matters.

“This investigation, if it had gone ahead, would have involved the most serious allegations and investigation being made of the Saudi royal family,” he said. “My job is to give advice as to whether that is a sensible thing in circumstances where I don’t believe the investigation would have led to anywhere except to the complete wreckage of a vital interest to our country.”

He said the fight against terrorism would have been harmed and thousands of British jobs lost.

The al-Yamamah deal to supply the Saudis with more than 100 Tornado and Hawk warplanes was originally agreed by Margaret Thatcher’s Conservative government in 1985.

The payments were said to have been made by BAE Systems, the UK’s biggest arms manufacturer, with the full knowledge of the Ministry of Defense.

According to a BBC Panorama investigation, BAE secretly paid up to £120 million a year on a quarterly basis into two accounts in Washington, over a ten-year period. The payments were said to have been written into secret annexes of the Al Yamamah contract for the provision of “support services”, and authorized by the MoD.

According to the report, the accounts were a “conduit” to Prince Bandar, who used one of them to run his private jet which clocked up thousands of miles each year. The SFO was said to have uncovered details of the payments at the time of its investigation, but had not established whether they were illegal.

A previous report by the National Audit Office into allegations that huge bribes were paid to secure the deal was suppressed in 1992, amid claims that publication would damage relations with the Saudis.

BAE said that any payments made under the terms of the deal were done so with the approval of the government.

“The Al Yamamah program is a government-to-government agreement and all such payments made under those agreements were made with the express approval of both the Saudi and the UK governments,” a spokesman said. “We deny all allegations of wrongdoing in relation to this important and strategic program and we will abide by the duty of confidentiality imposed on us by the agreement.”

Blair’s official spokesman refused to be drawn on whether the government knew and approved of the continuing payments.

“In terms of the allegations, we are not going to comment on it. It is a matter for others, not for us,” he said. An MoD spokesman said: “The MoD is unable to comment on these allegations since to do so would involve disclosing confidential information about al-Yamamah and that would cause the damage that ending the investigation was designed to prevent.”

Prince Bandar was said by the BBC to have refused to comment.

But while Blair strongly defended the decision last year to drop the SFO corruption inquiry, Gordon Brown has signaled his support for new controls on arms sales. Speaking last night at a Labour leadership hustling in London, the Chancellor - who takes over later this month as prime minister - said: “I hope we will be able to do more on arms sales in the next period.”

Roger Berry, a Labour MP who chairs the Commons Quadripartite Committee which covers arms deals, said that the latest allegations about the deal must now be properly investigated.

He said that if there was evidence of bribery or corruption in arms deals since new laws were introduced in 2001, then it would be a criminal offence. “These matters need to be properly investigated,” he told BBC Radio 4’s Today program. “It’s bad for British business, apart from anything else, if allegations of bribery popping around aren’t investigated.” (Source: timesonline)