The crisis engulfing David Cameron over phone hacking deepened on Saturday as Paddy Ashdown revealed that he had warned No 10 only days after the general election of "terrible damage" to the coalition if he employed Andy Coulson in Downing Street.

The former Liberal Democrat leader, who had been extensively briefed on details that had not been made public for legal reasons, was so convinced that the truth would eventually emerge that he contacted the prime minister's office.

Ashdown, a key player as the Liberal Democrats agonised over whether to join in a coalition with the Tories, told the Observer that, based on what he had been told, it was obvious Coulson's appointment as Cameron's director of communications would be a disaster.

"I warned No 10 within days of the election that they would suffer terrible damage if they did not get rid of Coulson, when these things came out, as it was inevitable they would," he said.

Cameron, who will meet Milly Dowler's parents to discuss the government's response to phone hacking, refused to heed the advice and recruited the former News of the World editor to be his right-hand man in charge of the media at No 10.

It has also emerged that Nick Clegg, the deputy prime minister, received similar briefings to those given to Ashdown before the election, which he raised with Cameron – only to be rebuffed by the prime minister, who insisted that it was right to give Coulson a "second chance".

Senior Whitehall sources say that Clegg was stunned by what he was told but concluded, after the coalition deal was struck, that he was powerless to change Cameron's mind. "Clegg said: 'It is not up to me to tell the prime minister who to appoint as his director of communications'," said a source.

Downing Street also faces fresh questions about why it failed to act on information passed by the Guardian to Cameron's director of strategy, Steve Hilton, about Coulson's professional relationship with the private detective Jonathan Rees.

Downing Street appeared to alter its story from claiming that the information passed to it was merely that which appeared in the newspaper to claiming that "much" of it was. The Guardian insists that Hilton was given information it had been unable to publish owing to legal proceedings, including the fact that Rees was awaiting trial for murder and that he had been jailed for seven years for conspiring to frame a woman by placing cocaine in her car.

Coulson, arrested by police on Friday over his role in the scandal, went on to be cleared by the security vetting team at Downing Street after three in-depth interviews about his professional and personal life. He was given "strap one" status, which allowed him the highest access to top-secret material.

The news will raise fresh doubts about Cameron's judgment in bringing Coulson into the centre of government and comes as the Observer can reveal that Cameron's former director of communications, who was released on bail by police on Friday, has now been fired by his latest employer, Kate Robertson.

Robertson, chair of Euro RSCG, one of the world's largest advertising companies, hired Coulson after he was forced out of Downing Street by phone-hacking allegations earlier this year and gave him responsibility for promoting her charity, One Young World. She said she could no longer work with Coulson after last week's "sickening" developments, adding that she felt "naive".

Recounting an emotional conversation with Coulson only days before his arrest, Robertson, who says she still counts him as a friend, said: "Every time I have had a conversation, and I spoke to him at the beginning of this week, he said: 'If you feel you need to step away, step away.' And to be honest with you, I was just going: 'I'm so devastated and so sorry.' The whole thing was absolutely horrific. I keep saying to myself: how naive are you really? I never asked him what the truth was. I said: 'What do you think your position is?' – this was months ago – and he said: 'It has been a terrible thing, I don't know that it is over.'

"And he always said: 'I will try to tell you what I know if I think it is going to be terrible, I don't want to damage One Young World in any way.' I accept the guy has now been arrested, but it is still a case of innocent until proven guilty.

"But, no, he can't do One Young World work at the moment, that is absolutely clear. I am really, really sad about the stuff this week. It is just awful and I can't say there haven't been a couple of big media figures who haven't said to me: 'You must be crazy, don't you realise he is going to get arrested?', because there have been. I am just so sad."

On Saturday Coulson denied a request from the Commons home affairs select committee for him to give fresh evidence, claiming it could prejudice the criminal investigation. News International's chief executive, Rebekah Brooks, responded to questions about the possibility that more of her titles had been involved in phone hacking by claiming she had "no reason to believe" that was the case.

Meanwhile, a 63-year-old man who was arrested in Surrey in connection with alleged corrupt payments made to police officers was released on police bail. Police would not comment on suggestions that he is a private investigator. Coulson is due to answer bail at the beginning of October. A Downing St spokesman said the issue of warnings about Coulson was being looked into.

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