MI6 and former Labour ministers are facing fresh pressure over Britain's involvement in the rendition of a prominent Libyan dissident as it emerged that the government is offering him more than £1m in compensation for being brutally treated by Muammar Gaddafi's secret police.

The government has offered the money to Abdel Hakim Belhaj in a move that would avoid MI6 appearing in open court, where it would face the prospect of explaining its role and that of ministers, the Guardian has been told.

Leigh Day, lawyers for Belhaj, who was appointed head of Tripoli's military council after the Libyan revolution, have served a claim on Sir Mark Allen, the MI6 officer at the centre of the affair. They are suing Allen, then the most senior officer in MI6 responsible for counter-terrorism, alleging "complicity in torture" and "misfeasance in public office".

They have filed a separate claim against the Commissioner for the British Indian Ocean Territory. A plane taking Belhaj and his wife Fatima Bouchar to Libya in 2004 is understood to have landed for refuelling at the US base on Diego Garcia.

Belhaj says he was told by Moussa Koussa, then head of Libyan intelligence, that the stopover in Diego Garcia – en route from Bangkok where he was seized, to Tripoli – happened with British permission.

In a letter to Koussa, dated 18 March 2004, discovered in a bombed Tripoli building, Allen said: "I congratulate you on the safe arrival of Abu Abdullah al-Sadiq [a name used by Belhaj]. This was the least we could do for you and for Libya to demonstrate the remarkable relationship we have built over the years." A few days later, Blair visited Gaddafi in a highly-publicised meeting.

Whitehall officials have repeatedly defended MI6's actions, saying Britain's foreign intelligence agency was following "ministerially authorised government policy".

Officials say that ministers were consulted about the rendition of Libyan dissidents. They also say that the Gaddafi regime gave assurances that the dissidents would not be mistreated if Britain handed them over.

Belhaj, his wife, and Sami al-Saadi, another Libyan dissident, have described how they were mistreated, in claims that could have serious implications for British officials and former Labour ministers alike.

Jack Straw, who at the time was foreign secretary, said after the discovery of the Allen letter: "We were opposed to unlawful rendition. We were opposed to any use of torture. Not only did we not agree with it; we were not complicit in it and nor did we turn a blind eye to it."

However, he added: "No foreign secretary can know all the details of what its intelligence agencies are doing at any one time." Though he has said he was "always happy to deal with any questions relating to his time as home secretary or foreign secretary", he has declined to comment further on the Libyan renditions.

It remains unclear precisely what MI6 told Straw, or any other minister, about the operation, and whether Gaddafi's officials gave assurances that they could not honour.

These questions may never be answered. British officials have said that Belhaj's civil case could have been heard in secret courts, now being proposed by the government, had they been in place then.

The courts would hear evidence from MI6 and MI5, but only so long as the information was never disclosed.

Asked about the reports, Sir Malcolm Rifkind, the former Conservative foreign secretary who chairs the parliamentary intelligence and security committee, told the BBC: "I think one's entitled to be extremely uneasy.

"It's very, very worrying indeed, because if [Belhaj] was rendered to Libya and if the UK intelligence agencies and the UK government were involved, that is not only contrary to the policy the British government has pursued for a long number of years, but also to the assurances that were given to the intelligence and security committee and to parliament as a whole."

On whether the intelligence agencies got authority from the government, "that's how [they] normally resolve the problem", Rifkind said.

Seeking government authority normally involved ministers, he continued. If ministers were consulted and gave their approval then they "must ultimately take responsibility," Rifkind added.

A government spokesman said: "A police investigation is underway, so we are unable to comment. [The government] will co-operate fully with investigations into allegations made by former Libyan detainees about UK involvement in their mistreatment by the Gaddafi regime. [It] will hold an independent judge-led inquiry once police investigations have concluded".