A Libyan Islamist has told how he and his family were imprisoned after being "rendered" in an operation MI6 hatched in co-operation with Muammar Gaddafi's intelligence services. The rendition occurred shortly before Tony Blair paid his first visit to the dictator.

Sami al-Saadi, his wife and four children, the youngest a girl aged six, were flown from Hong Kong to Tripoli, where they were taken straight to prison. Saadi was interrogated under torture while his family were held in a nearby cell.

"They handcuffed me and my wife on the plane, my kids and wife were crying all the way," he told the Guardian. "It was a very bad situation. My wife and children were held for two months, and psychologically punished. The Libyans told me that the British were very happy."

Saadi says he is now considering whether to sue the British government, making him the second Libyan rendition victim to threaten legal proceedings in less than a week.

The evidence that the family were victims of a British-led rendition operation is contained in a secret CIA document found in the abandoned office of Moussa Koussa, Gaddafi's former intelligence chief, in Tripoli last week.

In London, meanwhile, an official inquiry into Britain's role in torture and rendition since 9/11 says the government has provided information about the UK's role in the affair, and Whitehall sources defended intelligence agencies' actions by saying they were following "ministerially authorised government policy".

It is the first time evidence has emerged that the British intelligence agencies ran their own rendition operation, as opposed to co-operating with those that were mounted by the CIA.

Saadi was held for more than six years, during which time he says he was regularly beaten and subjected to electric shocks. Shortly after his arrival in Tripoli, he says, Moussa Koussa visited in person to explain how Gaddafi's new friends in the west were helping him track down the regime's opponents around the world. "He told me: 'You've been running from us, but since 9/11 I can pick up the phone and call MI6 or the CIA and they give us all the information we want on you. You've nowhere to hide.'"

Saadi, a leading member of a Libyan mujahideen group who was known by the nom de guerre Abu Munthir, was interrogated on one occasion by British intelligence officers, who he alleges did nothing to try to protect him after he told them he was being tortured.

The Foreign Office has declined to say whether it knew what became of Abu Munthir's family as a result of the rendition operation, describing this information as an "intelligence matter". A spokesman said: "Our position is that it is the government's longstanding policy not to comment on intelligence matters."

Saadi says he was tricked by the British authorities into travelling to Hong Kong. While in exile in China in March 2004 he approached British intelligence officers via an intermediary in the UK, he says, and was told that he would be permitted to return to London, where he had lived for three years after seeking asylum in 1993. First, however, he would have to be interviewed at the British consulate in Hong Kong, and would be met by British diplomats on his arrival.

Saadi flew to Hong Kong with his wife, two sons aged 12 and nine, and two daughters aged 14 and six. They were not met by any British officials but were detained by Chinese border guards over alleged passport irregularities, held for a week and then despatched to Tripoli.

Saadi says he always assumed the British were behind his rendition, "working behind the curtain". Confirmation came when Human Rights Watch, the New York-based NGO, discovered a cache of papers in Moussa Koussa's abandoned office.

Among the documents was a fax that the CIA sent to Tripoli on 23 March 2004. Marked SECRET/US ONLY/EXCEPT LIBYA, it concerns the forthcoming rendition of Saadi and his family. The wording suggests the CIA took no part in the planning of the operation, but was eager to become involved.

It says: "Our service has become aware that last weekend LIFG [Libyan Islamic Fighting Group] deputy Emir Abu Munthir and his spouse and children were being held in Hong Kong detention for immigration/passport violations. We are also aware that your service had been co-operating with the British to effect Abu Munthir's removal to Tripoli, and that you had an aircraft available for this purpose in the Maldives."

It goes on to explain that although Hong Kong had no wish to see a Libyan aircraft land on its territory, "to enable you to assume control of Abu Munthir and his family", the operation would work if the Libyans were to charter an aircraft registered in a third country, and that the US would assist with the cost.

The operation coincided exactly with Tony Blair's first visit to Libya. Two days after the fax was sent, Blair arrived to shake hands with Gaddafi, and said the two nations wanted to make "common cause" in counter-terrorism operations. It was also announced that Anglo-Dutch oil giant Shell had signed a £550m gas exploration deal. Three days later Saadi and his family were put aboard a private Egyptian-registered jet and flown to Tripoli.

Associates of Saadi cannot understand why his capture and interrogation would hold any great intelligence value for the British authorities, and are speculating that he may have been a "gift" from the British to the Gaddafi regime.

"On the plane I was told I was going to be electrocuted, hanged," Saadi said. "When we got to Tripoli my wife and I were in handcuffs, and our legs were tied together using wire and we were hooded. My wife recalls that she thought we were going to be hanged."

Saadi and his family were held initially at a jail in the Tajoura district, which he describes as "Mousa Koussa's family jail", and then at Abu Salim jail, a location where prisoners have been murdered and tortured for decades, according to human rights organisations. He says he spent the first 14 months in complete isolation in a cell measuring 6ft by 7ft.

"Whenever they felt I was withholding information they would beat me and subject me to electric shocks," he said.

As well as being tortured, he was repeatedly told that his family would be harmed and that he would be killed.

The UK was involved in the rendition of another Libyan Islamist earlier the same month. Other papers found among the Tripoli cache show that an MI6 tip-off allowed the CIA to abduct Abdul Hakin Belhaj in Bangkok. Belhaj, who later became a leading figure in the rebel forces that toppled Gaddafi, says he was tortured first by the CIA and then flown to Libya where he suffered severe abuse for several years, being hung from walls and immersed in ice baths. Belhaj says he too was interrogated by MI6 officers, who indicated they knew he was being tortured, but did nothing to help him.

On Thursday Belhaj met with British government representatives, who declined to make any apology. He too is considering whether to bring a claim for damages in the UK courts.

A number of Whitehall sources have said MI6 was complying with "ministerially authorised government policy" when Saadi and his family and Belhaj were rendered to Libya. However, the Foreign Office, Cabinet Office and Downing Street are all declining to say which department's ministers authorised the operations. A spokesman for Tony Blair said he knew nothing about the matter.

Jack Straw, who was foreign secretary at the time, said he welcomed the fact that an inquiry headed by Sir Peter Gibson would be examining the matter but did not answer questions about whether he had authorised the operation.

The inquiry headed by Gibson, a retired judge, that has been established to examine Britain's role in the mistreatment of terrorism suspects since 9/11, says that it was informed about the UK's involvement in the removal of Saadi from Hong Kong before the discovery of the Libyan government documents last weekend. It is unclear how much detail has been passed over to the inquiry staff.

It may be difficult for former ministers and intelligence officers to tell Gibson that they could not have expected Belhaj and Saadi and his family to be mistreated after they were handed over to Gaddafi's government. The use of torture had been well-documented by human rights groups, while the Foreign Office's human rights report for 2004 (pdf) states: "The UK remains seriously concerned by the human rights situation in Libya, including restrictions on freedom of expression and assembly, political prisoners, arbitrary detention and conditions in Libyan prisons." It added that the British were very keen to see Libya sign international agreements against torture.