The attorney general, Lord Goldsmith, yesterday announced that the Serious Fraud Office had halted its probe into allegations that a slush fund was used by BAE to pay Saudi dignitaries to secure multi-billion-pound deals.

Speaking in Brussels today, Mr Blair said that he took "full responsibility" for advising Lord Goldsmith that it was not in Britain's national interests for the inquiry to continue.

The prime minister - who also insisted he was unworried by yesterday's police interview about their cash-for-honours inquiry - said a continued investigation would have produced months or years of "ill feeling" between Britain and a key ally in the Middle East, probably to no purpose.

The decision prompted accusations of naked political interference in a criminal case in a bid to protect BAE Systems' commercial interests.

The company's share value soared by nearly £900m after the announcement was made.

Lord Goldsmith's statement in the House of Lords was unusual in that it did not refer to the claimed threats to British jobs, but instead concentrated on "national security".

The attorney general told the House of Lords that he had consulted the prime minister, the defence secretary, the foreign secretary and the intelligence services, and they had decided that "the wider public interest ... outweighed the need to maintain the rule of law".

The statement did not elaborate on the nature of the threat.

Challenge



The attorney general faces the prospect of a legal challenge after two pressure groups jointly instructed solicitors to explore the possibility of taking legal action against the decision.

The Campaign Against Arms Trade (CAAT) and the Corner House, a campaign group supporting environmental and social justice causes, will meet with solicitors on Monday.

Nicholas Gilby, a spokesman for CAAT, said: "The government's commitment to fighting fraud means nothing if BAE Systems is placed above the law. Democracy must not give way to bullying by arms companies.

"As with other criminal investigations, the Serious Fraud Office inquiry should be allowed to run its course." The two organisations were part of a coalition that wrote to the government earlier this month to call for the SFO inquiry to continue. In their joint letter, CAAT, the Corner House, British American Security Information Council and Saferworld described as "pure fantasy" claims that the cancellation of the Eurofighter deal with Saudi Arabia would threaten 50,000 British jobs.

Aswini Weereratne, a barrister with Doughty Street Chambers, a leading human-rights chambers, said that judicial review was legally feasible but tricky.

"It is possible to judicially review the decision of the prosecuting authority not to prosecute," she said.

"The courts do not like interfering with decisions relating to national security but there are signs that they are becoming more willing to challenge the government on national security, as with the issue of control orders."

Additionally, anyone challenging the decision has to show that they have sufficient direct interest in case, or "standing".

"To have sufficient interest to apply for judicial review a body would probably need to show that they had either been adversely affected by the decision or that they are raising an issue of public interest warranting judicial review and that they are the appropriate body to pursue such an application," Ms Weereratne said.

"On that basis it is arguable that even a national newspaper might have sufficient interest; alternatively an appropriate pressure group might do so."

Jobs



At BAE Systems, staff were celebrating the decision to drop the inquiry.

The Saudis had threatened to pull out of a new deal to supply Eurofighter jets unless the investigation was abandoned, threatening thousands of jobs.

Shares in BAE fell by as much as 10% in the last month as investors feared the worst for the Eurofighter deal, but the company value today soared from £12.79bn to £13.65bn.

Norman Lamb MP, the chief of staff to the Liberal Democrat leader Sir Menzies Campbell, described dropping the inquiry as an "outrageous and disgraceful" decision.

"Coming straight after a threat from the Saudis to withdraw from future business, this completely undermines the UK's reputation on good governance," he said.

"How on earth can we lecture the developing world on good governance when we interfere with and block a criminal investigation in this way?"

He added: "I think pressure has been applied. I think it's because the inquiry has been making substantial progress that it's been brought to an end."

The Lib Dems' constitutional affairs spokesman, Lord Goodhart, said that it was clear that ministers had forced the decision upon the SFO's director, Robert Wardle.

"We were told yesterday that there had been discussion the day before with the SFO. The director of the SFO was given the night to think about it and came back yesterday morning and agreed," he told BBC Radio 4's Today programme.

"So it's clear that it was not the SFO's own decision. It was not instigated by the SFO. This came from the top."

But Lyndsay Hoyle, a Labour MP with many constituents who work for BAE in Lancashire, said that they were celebrating "an early Christmas present".

"Quite rightly they were happy with the news," he said, adding that it was a boost to a wide range of companies including Rolls-Royce, which builds engines.

"Tens of thousands of jobs were put at risk by a 1980s issue."

He said that the investigation had been going on for too long and there was no evidence of any wrongdoing. "Jobs would have gone," he added.

Saudi lobbying



BAE and the Saudi embassy had frantically lobbied the government in recent weeks for the long-running investigation to be discontinued, with the company insisting it was poised to lose out on a third phase of the Al-Yamamah deal, in which the Saudis would buy 72 Eurofighter Typhoon aircraft in a deal worth £6bn.

The Saudis had also hinted that they would do a deal with the French instead if the inquiry pushed ahead. A 10-day ultimatum was reportedly issued by the Saudis earlier this month.

This came at a time when the SFO appeared to have made a significant breakthrough, with investigators on the brink of accessing key Swiss bank accounts.

A PR campaign headed by Lord Bell saw MPs from all parties urging the dropping of the investigation, citing fears that jobs would be lost in their constituencies.

But in its statements last night the government said that commercial considerations had played no part in the decision.

Mr Wardle issued a terse statement saying that he had dropped the Saudi end of the investigation "following representations that have been made both to the attorney general and the director of the SFO concerning the need to safeguard national and international security".

The destruction of its inquiry will be a severe blow to the SFO which has spent more than £2m on what was its most extensive current investigation, and taken hundreds of pages of statements from witnesses.

David Lee, who was assistant director of the SFO from 1989 to 1991, voiced his concern about the way the inquiry had been dropped.

"It seems to me a very unusual thing to happen. I have certainly never seen it before," he told Today.

"The timing is rather unfortunate next to the lobbying that has been going on. We could all do with more detail on the reasons.

"Additionally we have some concerns ... Is the right message being sent about the attitude to the potential for corruption and in particular what kind of precedent might be being set for other cases which are being investigated?

"Indeed, are we actually seeing interference by political or diplomatic factions in the judicial and investigatory process?"

BAE, in a statement, said it welcomed the dropping of the inquiry.

But the company and its executives may not yet be out of the woods.

The attorney general has allowed investigations to continue into BAE activities in Romania, Chile, the Czech Republic, South Africa and Tanzania, which legal sources say are making strong progress.

The UK made overseas bribery illegal in 2002, under US pressure. Labour ministers subsequently claimed they were determined to stamp out corruption, but in practice no prosecutions have taken place under the new law.