The government is already bracing itself for the cooling of relations with Moscow, which it believes will be an inevitable consequence of an extradition request. The request could be made as early as next month and government officials are convinced the Kremlin will demand, in return, the extradition of Boris Berezovsky, the Russian millionaire oligarch who was granted asylum in the UK.

Mr Lugovoi, 41, a former bodyguard with the KGB, was one of several people interviewed by detectives from Scotland Yard's counter-terrorism command in Moscow last month. The Yard is declining to comment on the case and details of the alleged evidence against Mr Lugovoi remain unclear.

The businessman has repeatedly denied any involvement in the murder, and last night told the Guardian: "I am not guilty. I have nothing to do with the killing of Litvinenko." He added that he was unaware that Scotland Yard was planning to seek his extradition.

Mr Lugovoi met Mr Litvinenko at the Millennium Hotel in Grosvenor Square, London, on November 1. Mr Litvinenko fell ill shortly afterwards and died in University College Hospital, London, on November 23. In the intervening period, Mr Lugovoi appeared to leave a trail of radioactive polonium-210 at a number of offices and hotels around London, and traces of the substance were also found on board an aircraft in which he travelled.

Several other people have also tested positive for polonium-210, however, including eight members of staff and one other guest at the Millennium Hotel. Dimitri Kovtun, a Russian business associate of Mr Lugovoi who was present at the hotel meeting, was also contaminated.

On his return to Moscow, Mr Lugovoi called a televised press conference to protest his innocence, and pointed out that traces of polonium-210 had been found on his wife and children. "To think that I would handle the stuff and put them at risk is ludicrous," he said. "Someone is trying to set me up. But I can't understand who. Or why."

Associates of the dead man have repeatedly accused President Vladimir Putin's government of being behind his murder, a claim the Kremlin rejects. While it is known that detectives believe they have uncovered evidence pointing to Mr Lugovoi's involvement, it is not clear whether they have established a motive for the murder.

Any attempt to extradite Mr Lugovoi could founder on the Russian constitution, which offers citizens protection against enforced removal from the country. However, senior British government officials have told the Guardian that officials in Moscow have already indicated their willingness to strike a deal which would see the suspect being handed over in return for Mr Berezovsky's extradition. Mr Berezovsky amassed his estimated £800m fortune during Russia's rush to privatisation in the 1990s, and fled to the UK after falling out with President Putin six years ago. Mr Litvinenko followed him, claiming that he had been instructed to murder Mr Berezovsky.

The oligarch has already fought off one extradition attempt, after Moscow accused him of large-scale fraud. After that charge was dropped, the Kremlin accused him of plotting to overthrow the government by force.

He cannot be forced to return to Russia, however, as the UK courts have ruled that the charges against him are politically-motivated and that he could not expect to receive a fair trial.

Government officials say that they have difficulty trying to explain to the Russian authorities that the UK courts are entirely independent, and that Mr Berezovsky cannot be extradited once the courts have ruled against such a move. As a result, there is growing nervousness in Whitehall over the possibility of a diplomatic rift, and about the economic consequences.

British business is heavily involved in Russia, with direct investment of nearly £2bn and exports of close to £3bn in 2005.

The Kremlin has frequently used punitive economic measures as a blunt diplomatic tool. It cut off the gas supply to Ukraine and Belarus in the midst of political disputes, raising anxiety within the EU over Europe's dependence on Moscow for energy supplies. Last month Shell was forced to sell its controlling share in the world's biggest oil and gas venture, Sakhalin 2, to the Russian energy giant Gazprom. BP has also come under pressure to give up some of its share in a UK-Russian oil company, TNK-BP. It has been targeted by the state licensing agency, Rosnedra, which is threatening to strip it of its permit for a string of alleged infringements.

Meanwhile, the Health Protection Agency reported yesterday that a total of 129 people appear to have been exposed to polonium-210, and that 13 of them were at a small risk of long-term illness. Traces of radiation have been found at 20 locations in London, and several remain sealed off.

· Main players

Alexander Litvinenko

A former officer of the KGB and its successor, the FSB, Litvinenko fled to Britain in 2001, claiming he had been ordered to murder the Russian oligarch Boris Berezovsky. He then accused his former superiors of organising a bombing campaign to trigger war in Chechnya. Died of radioactive poisoning, aged 44, on November 23.

Andrei Lugovoi

A former bodyguard with the KGB, and now a successful Moscow businessman whose company, Pershin, controls a security consultancy and a soft drinks manufacturer and employs around 500 people. Mr Lugovoi, 41, met Litvinenko at the Millennium Hotel in London on November 1, hours before the ex-spy fell ill, but denies any role in the murder.

Dimitri Kovtun

An old friend of Mr Lugovoi from their days in the KGB, he is now a Moscow-based businessman and was at the meeting at the Millennium Hotel. Kovtun, 42, was contaminated with polonium-210 and traces have also been found in Hamburg, where he had visited his ex-wife. He too denies any involvement.

Mario Scaramella

An Italian self-styled security consultant who claims to have met Litvinenko on the day the Russian was poisoned, to warn of a plot against his life. He too appeared to have been poisoned, but that was later discovered to have been the result of a testing error. On his return to Rome, Scaramella, 36, was arrested on suspicion of gun-running and violating state secrets.

Boris Berezovsky

Russian billionaire created his empire during Russia's privatisation drive and fled to the UK after falling out with Vladimir Putin six years ago.