The 7 July bombers who killed 52 people in terrorist attacks in London in 2005 were once described by Britain's security service as 'clean skins'.

The vivid phrase implied that a gang of homegrown terrorists had come from nowhere, without an intelligence trail. But Dame Eliza Manningham-Buller, the director-general of MI5, is bracing herself for embarrassing revelations on the full extent of what the British intelligence community knew about the bombers, and in particular the ringleader of the attacks, Mohammad Sidique Khan. The disclosures will add to pressure for a full public inquiry.

Manningham-Buller is retiring in April and some Whitehall sources have suggested this is a pre-emptive move by MI5 to avoid embarrassment over revelations about intelligence failings. Senior security officials insist it was always known Manningham-Buller would leave her post in April.

MI5 now admit that far from being a 'clean skin', Khan had been on their radar screen since 2003. And The Observer can now reveal that more than a year before he detonated his Tube bomb, Khan had been listed as a 'desirable suspect' by MI5, along with fellow bomber Shehzad Tanweer.

One senior security official gave a chilling warning that even with the increase in resources MI5 has now been given, it is unlikely they would have been able to pick up somebody like Khan, given the information they had at the time.

He said: 'If the threat was the same as in 2005 - that is, we were looking at 50 potential terror networks in the UK - we would have a better chance of picking up somebody like Khan. But we are now dealing with some 200 potential terror networks in the UK and to be quite honest we wouldn't have a hope in hell.

'We can't put every person who expresses anger about British foreign policy under 24-hour surveillance, or we would be talking about a Stasi-style secret police force.'

Although legal restrictions mean The Observer is not able to report the full extent of MI5's intelligence on the events of 7 July, this paper has seen remarkable detail about the security service's knowledge of Khan, including transcripts of conversations involving him that were picked up by MI5 surveillance officers.

They show that a year before the July attacks, Khan had jihadist leanings and wanted to help militants in Pakistan and Afghanistan. The transcripts reveal that he was also highly critical of Britain. At one stage Khan mentions terrorism, although there is no indication he has knowledge of any operation or planning of an attack.

Reports from the Home Office and from Parliament's Intelligence and Security Committee inquiry into the July attacks cleared MI5 of any blame for not forestalling the bombings. They accepted the security service's claim that officers were fully stretched investigating other active terror plots and resources were spread too thinly to mount surveillance on every potential Islamic militant.

However, the MPs on the Intelligence and Security Committee were not given transcripts of the conversations now seen by The Observer. MI5 believed that the recorded conversations showed no evidence of terrorist intent, but merely of discussions about financial fraud.

Before 7 July, MI5 had recordings and photographs of Khan on file, and he was viewed as a potential Islamic terrorist. He had been picked up by MI5 surveillance officers involved in a counter-terrorism operation that had focused on more than 50 potential British terrorists in Britain.

MI5, however, did not consider Khan a top priority because there was no indication he was preparing an attack. Instead of labelling him an 'essential' suspect and putting him under full surveillance - a costly affair that can take up to 20 officers - he was described only as a 'desirable' suspect.

Photographs were taken of Khan at the home of another terror suspect under surveillance. At one stage a photograph of Khan was distributed to foreign terror suspects imprisoned overseas.

The Observer has learnt however that a photograph of Khan was not shown to a detainee who knew of his extremist views, because it was not thought to be of sufficient quality. This detainee recognised Khan after seeing his picture following the 7 July bombing. Had Khan been identified from his photograph earlier, he might have been picked up sooner.

In February 2005, the security service received a report naming two individuals who had travelled to Afghanistan, both with extremist views. Although MI5 tried to discover who these individuals were, it was only after 7 July that one of them was identified as Khan.

Despite the growing body of evidence that the security service missed the opportunity to thwart the 7 July attacks, senior security officials remain adamant they could not have done anything differently. They claim it was only after the London atrocities that it was possible to work out that Khan was the individual in certain bugged conversations. He was often known by a different name and was simply an unidentified individual in separate counter-terrorism surveillance operations.

They point out that at the time the priority of MI5 officers was to target those known to be a 'real and live' threat. As a result, security officials say, at least two other terror attacks were prevented.