As director of Israeli military intelligence from mid-1950 to early 1955, Binyamin Gibli, who has died aged 89, was a key player in what was arguably his country's most debilitating political scandal, the Lavon affair. He was responsible for initiating an illicit campaign of bombing and sabotage against western targets in Egypt, and, having been forced to resign, he later admitted having forged documents that falsely implicated his boss, the Israeli defence minister Pinhas Lavon, in the plot.

The affair had major repercussions on two fronts. In Egypt, it arguably fuelled the 1956 Suez crisis, and hastened the departure from the country of 50,000 Jews, who came to be seen as a fifth column. In Israel, it forced the resignation of Lavon, sparked a crisis in the ruling Labour party involving key figures such as Shimon Peres and Moshe Dayan, emboldened Israel's press and ultimately demolished the career of the former premier David Ben-Gurion.

The Lavon affair had its origins in Israeli concerns in the early 1950s that the US was becoming too friendly with Egypt's charismatic young leader, Gamal Abdel Nasser, seeing him as a potential bastion against Russia. Having failed to influence US policy through diplomatic means, Gibli and his circle initiated a bombing campaign in Egypt, codenamed Operation Shoshana (Susannah), in the hope that the chaos it wrought would be blamed on local communists or the Muslim Brotherhood threatening counter-revolution. Washington, they reasoned, would then shun Nasser as weak. They also hoped that Britain might shelve plans to shut its military base at Suez, which Israel regarded as a useful defensive bulwark.

But Shoshana backfired spectacularly. In early July 1954, homemade bombs were left at a post office in Alexandria, the US Information Agency libraries in Alexandria and Cairo, and a British-owned theatre. But they did little damage and caused no injuries. Then, on July 23, a device being carried to the Rio Cinema in Alexandria exploded in the agent's pocket, and he and 10 other suspects were arrested and put on trial. All the indications suggested that the Egyptian authorities knew in advance what was happening.

Two of the accused were hanged: one committed suicide and another died during interrogation. The remaining captives were released only in 1968 in a prisoner exchange following the six-day war, and it was not until 2005 that Israel admitted responsibility for the affair and honoured the Egyptian Jewish agents involved.

Gibli resigned in March 1955, two months after his boss Lavon, who had accused him of perjury, forgery, insubordination and criminal negligence. Much later, however, Gibli's former secretary revealed that a document supposedly signed by Lavon and sent by Gibli to Dayan was indeed a forgery. In 1960, Lavon was finally absolved of any involvement in the bombing campaign.

Gibli was born in Petah Tikva, near what is now Tel Aviv, four years after his parents arrived in Palestine from Bryansk, in western Russia. A member of the Haganah militia, from 1941 to 1944 he worked for the British Mandate police. In 1948, during the Israeli war of independence, he headed the police intelligence unit in Jerusalem. That summer, he sat on a four-man tribunal that tried and sentenced to death the Haganah commander Meir Tobianski on charges of passing military information to Jordan and Britain. Tobianski, a former officer in the Royal Corps of Engineers and employee of the British-run Jerusalem Electricity Company, was posthumously cleared. The chairman of the court was jailed for manslaughter, but Gibli avoided prosecution.

In 1950 he became head of the Israeli military intelligence force, Aman, and promptly ignited a turf war with the Israeli foreign ministry and the intelligence service Mossad by trying to extend Aman's remit to all foreign operations. The following year he set up a network of secret units, including unit 131, with sleeper cells in Alexandria and Cairo, who were later responsible for Shoshana. Avri Elad (formerly Abraham Seidenberg), who took over the running of unit 131 but was later jailed for 10 years for selling secrets to Egypt, insisted at his trial that Gibli, not Lavon, had given the order for action. The signal, he said, was a radio broadcast of an English cake recipe.

After his resignation, Gibli remained in the Israel defence forces and commanded the Golani Brigade in Gaza during the 1956 Suez war. He then served as Israeli military attaché in Scandinavia and London, where he was in 1960 when news of his forgery broke. He finally admitted the sham and was fired from the military.

He later headed a car manufacturer and the Israel Electric Corporation. His brother Avshalom swore that he was always haunted by the Tobianski trial and the Lavon affair. The historian Tom Segev wrote that Gibli belonged to Israel's "clandestine aristocracy [who treated] the law as an unnecessary encumbrance and preferred to stick to their youthful tricks".

· Binyamin Gibli, military intelligence officer, born 1919; died August 20 2008