MI5 has said that it is prepared to hand over sensitive files on one of the most high-profile murders during the Northern Ireland Troubles carried out by loyalist gunmen working with members of the British security forces.

The offer in the case of the Pat Finucane, the well-known civil rights and defence lawyer murdered in front of his wife and three young children in 1989, is contained in confidential US embassy cables passed to WikiLeaks.

Supporters of Finucane welcomed the revelation of the offer as "highly significant" and believe it could pave the way for a fresh inquiry into the killing that would be acceptable to the family.

Owen Paterson, the Northern Ireland secretary, has told Finucane's widow that he will decide early next year whether to hold a hearing that could shine a new light on collusion between gunmen from the Ulster Freedom Fighters and members of the security forces.

A refusal to hold such a hearing, which Paterson has questioned in the past, would prevent an examination of the MI5 files.

Finucane's supporters spoke out after leaked US embassy cables, published by WikiLeaks, showed that:

• Bertie Ahern, the Irish prime minister between 1997 and 2008, told US diplomats that "everyone knows the UK was involved" in the murder.

• US diplomats feared that "elements of the security-legal establishments" in Britain beyond MI5 were fighting hard to resist an inquiry.

• Brian Cowen, the current Irish prime minister, warned that a failure to hold an inquiry could be a "deal breaker".

Finucane's family said MI5's offer was a highly significant development in their 20-year battle to uncover the circumstances surrounding the murder.

The Security Service's offer is revealed in a cable from June 2005, written by the US ambassador to Dublin, James C Kenny, which reported on a meeting between the head of MI5 and Mitchell Reiss, the US special envoy to Northern Ireland. In an account of the meeting between Reiss and Ahern, the ambassador wrote: "Reiss briefed him on his talks in London, including with the head of MI5 [Eliza Manningham-Buller], who committed to turning over all evidence her agency has to the inquiry, but she was adamant that the inquiry will proceed using the new legislation."

Peter Madden, Finucane's partner in the Belfast solicitors' firm Madden and Finucane, said: "This might significantly change things. This is something new and unexpected. It will have to be considered by the Finucane family." Madden said the family would proceed with care because MI5 said any inquiry would be carried out under new legislation, which allows for material to be withheld from the final report. The family have demanded the same terms as the Bloody Sunday inquiry, but the legislation for that dated back to the 1920s and was repealed in 2005.

Madden said the family may change its mind in light of the MI5 offer. "Our stance has been that we want the inquiry but it's the way the inquiry is proposed that is difficult to be part of, if it's held under the 2005 Inquiries Act. We need to look very carefully at the cables. I think [it is] highly significant for the family and it might well change things."

Ahern told the US he was adamant that members of the British security forces were involved in Finucane's murder. The cable said: "The taoiseach said that the GOI wants the UK to provide evidence acknowledging its involvement in Finucane's murder and it wants to know how high in the UK government collusion went. He said if the UK were to provide the information, it would only grab the headlines for a few hours because 'everyone knows the UK was involved'."

A year earlier, US diplomats raised fears that some forces in British were determined to block an inquiry. A cable by the same ambassador on 26 July 2004 quoted Ahern as saying: "Tony [Blair] knows what he has to do." An explanatory comment inserted by the US ambassador noted: "Presumably, that the PM will have to overrule elements of the security-legal establishments to see that some form of public inquiry is held." The elements resisting an inquiry could be the old Royal Ulster Constabulary Special Branch and British military intelligence.

Lord Stevens of Kirkwhelpington, a former commissioner of the Metropolitan Police, concluded in a report in 2003 that members of the security forces had colluded in the murder of Finucane.

Several members of the UFF involved in the murder turned out to have been either agents or informers for the security services.

Meanwhile, Paterson told Geraldine Finucane that he has an "open mind" on whether to hold a public inquiry.

David Cameron told MPs in June – on the day he published findings of the £200m inquiry into the 1972 Bloody Sunday shootings – that there would be "no more open-ended and costly inquiries into the past", though he added that each case would be considered on its merits.

In his letter to Finucane's widow, Paterson said that the factors influencing his decision would include: "the commitment made to parliament by the previous government in 2004", "the experience of the other inquiries established after the Weston Park commitments", "political developments", "the potential length of any inquiry" and "the potential cost of an inquiry and the current pressures on the UK government's finances".

"It is my intention to consider the public interest carefully and in detail at the end of the two month period for representations," he informed Geraldine Finucane, "and then take a decision after such consideration as to whether or not to hold a public inquiry into the death of your husband."

Officials in the UK believe a public inquiry would raise difficult questions for the military but not for MI5. To win MI5's support, Blair made two key changes to the legislation governing public inquiries to prevent investigation beyond the official files it has been granted.

Alex Attwood, an SDLP minister in the Northern Ireland executive, said last night he regarded the decision of Mitchell Reiss to highlight the MI5 offer as potentially significant.

"Mitchell Reiss very much understood and had the measure of London," Attwood said. "He was not going to buy a pig in a poke."