With his flawless English, his expensive Italian suits and his place at the London School of Economics, Saif al-Islam Gaddafi appeared to be a man with whom the west could do business: a man who could smooth access to his country's vast mineral resources while avoiding the need to deal with his famously capricious father.

As state security forces were reported to be firing relentlessly into crowds of civilian protesters on Monday, and with Gaddafi Jr appearing on television to threaten a civil war in which the regime "will fight to the last minute, until the last bullet", many of his erstwhile associates were questioning their friendships with him.

The LSE has been quick to distance itself from Saif, issuing a statement in which it said the university had had a number of links with Libya, but that "in view of the highly distressing news from Libya over the weekend of 19-20 February, the school has reconsidered those links as a matter of urgency".

Although the LSE had accepted £1.5m from the Gaddafi International Charity and Development Foundation, an organisation headed by Saif – some of which was to finance "a virtual democracy centre" – the university stressed that it was to be paid over five years, and only £300,000 has been received to date. "In current difficult circumstances across the region, the school has decided to stop new activities under that programme," the statement said. The LSE has also received scholarship funding in return for advice given to the Libyan Investment Authority in London. "No further receipts are anticipated," the university said.

Professor David Held, an academic adviser to Saif Gaddafi during his four years at the LSE, said: "Watching Saif give that speech – looking so exhausted, nervous and, frankly, terrible – was the stuff of Shakespeare and of Freud: a young man torn by a struggle between loyalty to his father and his family, and the beliefs he had come to hold for reform, democracy and the rule of law. The man giving that speech wasn't the Saif I had got to know well over those years."

The university's move to break its financial links to the regime in Tripoli did nothing to silence criticism, however. Raheem Kassam, director of the anti-radicalisation group Student Rights, said: "LSE has the most market-driven fund-raising model there is in the UK. Has that model reduced them into a simple gun for hire?"

An explanation for Gaddafi's arrival at the LSE in 2002 may be found in one of the WikiLeaks cables, in which a US diplomat notes that "creating the appearance of useful employment for al-Qadhafi's offspring has been an important objective for the regime".

Shortly before he arrived, apparently with the blessing of the late Fred Halliday, professor of international relations [see ensuing note], he startled some of the academic staff by insisting that it was his father, and not Anthony Giddens, emeritus professor at the university, who created the concept of the third way, then a pet philosophy of Tony Blair.

[This update was inserted on 22 February 2011: Following publication of this article, the Guardian was contacted by Fred Halliday's son Alex, and four University of London academics, all noting that Fred Halliday is formally on the record as having opposed LSE acceptance of Libyan funds. On the question of whether Saif Qaddafi as an individual student should be accepted at the LSE, the recollection of Alex Halliday, Fred Halliday's wife Maxine Molyneux, and some others is that here, too, Professor Halliday objected. The assertion that Fred Halliday agreed to Saif Gaddafi's acceptance at LSE was made during a 2002 interview with the Herald, Glasgow, by a representative of Saif Gaddafi.]

In the introduction to his doctoral dissertation on global governance, published in 2008, Gaddafi wrote: "I shall be primarily concerned with what I argue is the central failing of the current system of global governance in the new global environment: that it is highly undemocratic."

The purpose of his dissertation, he added, was to analyse "how to create more just and democratic global governing institutions", focusing on the importance of the role of "civil society".

Six months after arriving in the UK, and with US-led forces about to invade Iraq, he is said to have approached MI6 to inform the agency that his father's regime was prepared to abandon its nuclear weapons programme. The contact led to negotiations between Libya, Britain and the US which saw the programme dismantled, and the Gaddafi regime begin to be allowed in from the cold.

While studying for his PhD, Saif enjoyed a life of considerable luxury in one of London's wealthiest and most prestigious suburbs. In August 2009 Gaddafi bought his son a £10m house in north London. Inside the neo-Georgian eight-bedroom mansion, Saif could relax in his own swimming pool sauna room, whirlpool bath and suede-lined cinema room.

Now the entourage of blacked-out cars parked on Saif's driveway has disappeared and there is less need for the forest of CCTV cameras or the private security team who had been on hand to protect him at all times.

During his time in London Gaddafi mixed socially with Lord Mandelson and the financier Nathaniel Rothschild, and was said to be on friendly terms with the Duke of York. He played a leading role in talks that led to the 2009 release of Abdelbaset al-Megrahi, the man convicted of the 1988 Lockerbie bombing in which 270 people died. While flying Megrahi home to Libya on a private jet, Gaddafi Jr gave a television interview in which he said the release had been linked to lucrative business deals.

Mandelson later insisted any suggestion that the British government had struck a deal and then instructed the Scottish government to release Megrahi was wrong, implausible "and actually quite offensive".

A review of documentation relating to the release conducted by the cabinet secretary, Sir Gus O'Donnell, reported earlier this month that the British government had been anxious to avoiding harming the country's commercial interests, and that there would be "severe ramifications for UK interests" if Megrahi was to die in prison.

• This article was amended on 22 and 23 February 2011, clarifying the reference to Professor Fred Halliday's stance on LSE acceptance of Saif Gaddafi. A published clarification is also expected in the Guardian newspaper.