Disclosing MI5 files about the July 7 suicide bombers to the families of those killed in the London attacks would be "impossible", counsel for the Security Service and the home secretary said today.

Investigating claims that MI5 could have prevented the 2005 atrocities would involve "handing over the keys" to MI5's Thames House headquarters, Neil Garnham QC told a hearing to decide the scope of the inquests into the bombings.

He said sensitive intelligence could be seen by the coroner and counsel to the inquests. However, any jurors would be subjected to intrusive vetting, he said, and neither the bereaved families nor their lawyers would be allowed to see it.

He said two reports by the parliamentary intelligence and security committee (ISC) had adequately investigated MI5's involvement. He admitted the committee was not "institutionally independent" because it was appointed by and reported to the prime minister, but he said it was operationally independent.

Last year, the committee emphasised MI5's lack of resources before 2005. Even if MI5 had had more resources, it would not have made a difference, a report said, because its action was "directed by the assessment of the threat".

Mohammad Sidique Khan and Shehzad Tanweer had appeared on MI5's radar but were not identified. There was nothing to suggest they warranted attention above other targets, the committee said.

The coroner, Lady Justice Hallett, asked whether it would be possible to restrict material to the July 7 attacks. "The families want to know why the decisions were taken in the way they were, and to put questions," she said.

The problem was, said Garnham, how to isolate the July 7 decision from all the other investigations MI5 was carrying out. "It is difficult to see how that can be done without, metaphorically speaking, handing over the keys to Thames House."

Patrick O'Connor QC, representing families of the victims, told the hearing on Tuesday that there were flaws in MI5's assessment policy, record-keeping and co-operation with other agencies.