A London-based PR firm carried out a $540m covert 'propaganda' operation from an office in Iraq, it has been revealed.

Bell Pottinger, the firm set up by Margaret Thatcher's PR guru Lord Bell in 1989, set up a base in Camp Victory in Baghdad, in what is believed to be one of the most-costly PR contracts in history.

From here, nearly 300 staff operated a top-secret 'Psychological operations' task force, which included writing soap operas and allegedly distributing fake al-Qaeda videos which were used to track the people watching them.

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Bell Pottinger was part of a 'psychological operations task force', working in Baghdad

The UK-based PR firm set up a base in Camp Victory (pictured) in Baghdad

An investigation by the Bureau of Investigative Journalism revealed the details of the multi-million pound operation.

Bell Pottinger is understood to have been funded some $540million from the US Department of Defence (DoD) for five contracts from May 2007 to December 2011, according to the Times and the Bureau of Investigative Journalism

Lord Tim Bell, the former spin doctor to Margaret Thatcher, confirmed Bell Pottinger reported to the Pentagon, the CIA and the National Security Council on its work in Iraq.

Lord Bell, who resigned as chairman of the firm this year, told The Sunday Times: 'It was a covert military operation.

'It was covered by various secrecy documents. We were very proud of it.'

Lord Tim Bell (pictured in 2011), confirmed Bell Pottinger reported to the Pentagon, the CIA and the National Security Council on its work in Iraq

Bell Pottinger operated in Iraq from 2007-2011, and was paid some $540m by the Pentagon

The firm is thought to have employed around 300 staff at the heigh of its operation.

Costs were spent on production and distribution, however the company is thought to have made around £15million a year in fees.

Former video editor Martin Wells, 52, from Bath, had been hired by the PR firm and sent to Baghdad to work in the conflict resolution division of Bell Pottinger - but he had no idea what he was getting into.

Speaking to the Times, he described his time at Camp Victory as 'shocking, eye-opening and life-changing.'

He claimed his team was tasked with producing fake al-Qaeda propaganda films, which, when played, would relay the viewers' IP address back to a secure military site.

This could then be used to track potential terrorists.

The work carried out by Bell Pottinger in Iraq included psychological operations to protect coalition forces and Iraqi people from terrorist attacks, while helping to support the security services. Pictured, soldiers at Camp Victory

With work including scripting Arabic soap operas and putting together news bulletins for local stations, Bell Pottinger's initial work had been the high-profile 'promotion of democratic elections'.

It then, reports the Times, 'became engaged in a wider and secret propaganda programme to promote the US agenda covertly across the media'.