An agent working for Germany's answer to MI5 was at the scene of one of the 10 murders carried out by neo-Nazi terrorists, the domestic intelligence agency has confirmed, fuelling speculation that the killers' movements were known to the authorities during their 13 years on the run.

The undercover officer was in an internet cafe in the central city of Kassel in Hessen when a 21-year-old Turk was shot at point blank range on 6 April 2006, a spokesman for the Hessen branch of the Office for the Protection of the Constitution (BfV) said on Tuesday.

The admission has added yet more controversy to an already contentious case, which the chancellor, Angela Merkel, has described as "mortifying" for Germany.

The investigation into the activities of the so-called National Socialist Underground was broadened on Tuesday to take in previously unsolved crimes across the country, amid fears that a network of supporters may have helped them carry out further attacks.

These include suspected terror attacks in Cologne and Düsseldorf from 2000 to 2004 that injured more than 30 people, most of them foreigners, and the attempted 2008 murder of a Bavarian police chief who was stabbed by a masked assailant who yelled: "Greetings from the national resistance!".

Critics say German authorities have played down the existence of rightwing extremism, concentrating instead on the threats posed by leftwing terrorists and Islamic fundamentalists. Whether they deliberately turned a blind eye or genuinely did not have a handle on the violence being wrought by neo-Nazis is open to interpretation.

Authorities in the state of Thuringia, where the three key members of the terror cell all come from, admit they have 24 ringbinders full of intelligence on the trio.

"The intelligence service has completely failed," said Hans-Christian Ströbele, a member of the parliamentary committee which monitors Germany's secret service agencies, following an emergency meeting on Tuesday. "It's probably the biggest secret service cock-up since German reunification," said the Berliner Zeitung newspaper in an editorial.

The scandal has gripped Germany for days as the country struggles to understand how the rightwing terror cell managed to evade capture for so long despite being apparently responsible for 10 murders, including the death of a policewoman, at least 14 bank robberies and two vicious nail bomb attacks between 2000 and 2007. The group has been dubbed the Brown Army Faction, a reference to the Red Army Faction, also known as the Baader Meinhof gang, a leftwing terrorist group that committed a series of murders in the 1970s and 80s. In Germany, brown remains a colour inextricably linked with the Nazi uniform.

The case came to light earlier this month when two known neo-Nazis, Uwe Mundlos, 38, and Uwe Böhnhardt, 34, were found shot dead in a burnt out campervan in what appeared to be a twin suicide pact. Hours later, their flat in the quiet suburbs of the east German town of Zwickau was blown up, an explosion detonated by alleged accomplice Beate Zschäpe, 36, who turned herself into police days later.

When investigators searched the charred remains of the van and the house, they found a number of highly incriminating pieces of evidence, including the gun carried by Michele Kiesewetter, the 22-year-old police officer believed to have been shot dead in Heilbronn, Baden-Württemberg in 2007. They also discovered a bizarre Pink Panther-inspired homemade DVD gloating that the National Socialist Underground was responsible for a series of unsolved murders known as the Döner Killings, which targeted mostly Turkish immigrants in Germany, some of whom worked in fast food stalls, between 2000 and 2006.

Until now, German detectives have suggested that foreign gangs, probably from Turkey, were responsible for the murders: their investigation was even codenamed Operation Bosphorus.

Relatives of the victims say the reputations of the dead men were besmirched by investigators. Kerim Simsek, whose father Enver was shot down on 9 September 2000, claimed police said his father "was mixed up with the mafia and smuggled drugs – no one even mentioned a rightwing extremist motive," he told Bild.

Ströbele said Germany's elite had totally underestimated the threat of rightwing terrorism. "They have been determined to play it down. Just a few weeks ago, Hans-Peter Friedrich, the interior minister, was saying there was no rightwing terrorism in Germany," he said. "They are always very quick to jump to conclusions if they think leftwing terrorists or Islamist fundamentalists are responsible for a crime and yet they didn't want to believe there could be a serious problem with neo-Nazis."

Ströbele said that 160 officers worked on Operation Bosphorus, investigating 11,000 people "Why didn't they follow the trail to rightwing radicals?" he said, as he called for a thorough investigation to discover how the terror cell managed to evade capture. More information was needed to establish how and why the secret service agent was in the Kassel internet cafe when the shots were fired in 2006, he said. Until now, the agent has insisted it was an unhappy coincidence he was at the crime scene "either during the murder or within a minute or two of it", said Ströbele.

The agent was arrested after other witnesses noticed he was the only customer who failed to call the police. After being questioned as a suspect, he confessed his identity and no charges were brought. A spokesman for Hessen's BfV said he was subsequently moved out of intelligence work and into a less sensitive department of Hessen's regional council.

The national BfV continues to deny any contact with the three suspects or any knowledge of their whereabouts since 1998, when a warrant was issued for their arrest following the discovery of a bomb-making factory in a garage rented by Zschäpe. The Hessen branch said it had found no evidence that its agents were in contact with Mundlos, Böhnhardt and Zschäpe.

Germans try to make sense of scandal

Germany has been gripped by the scandal unfolding around the neo-Nazi National Socialist Underground. But so much of what has emerged so far does not quite make sense. Here are some questions ordinary Germans would like answering:

1. Why did Beate Zschäpe decide to turn herself in to the police? Is she hoping to turn supergrass and give state's evidence in return for a shorter sentence?

2. Did Uwe Mundlos and Uwe Böhnhardt really kill themselves? One man was shot in the head; another in the chest (the latter is an unusual form of suicide). Could Zschäpe have murdered them both? Did they set fire to their campervan before killing themselves or did someone else light the match afterwards?

3. Why did the two men burn the money they had apparently stolen from a Zwickauer bank that day rather than give it to Zschäpe?

4. How did the Pink Panther confession DVDs survive flames in the trio's Zwickau flat despite temperatures being so hot that investigators say they found melted guns?

5. How did the National Socialist Underground choose their victims? Were they all chosen at random?

6. Can the group be linked to any other unsolved crimes?

7. Did the authorities have any contact with the group during their 13 years on the run?

8. Why did investigators looking into the nine so-called Doner Killings blame foreign mafia rather than properly investigating rightwing hatred as a motive, considering that all the victims were immigrants?