Margaret Thatcher agreed to a cover-up when information from a Czech defector confirmed in 1980 that John Stonehouse, the former Labour minister who "did a Reggie Perrin", had been a spy.

At a Downing Street meeting on 6 October 1980 with her home secretary, William Whitelaw, and attorney-general Sir Michael Havers, Thatcher agreed that Stonehouse should not be confronted with the new information nor prosecuted.

The decision to keep secret Stonehouse's espionage followed hard on the heels of the exposure in 1979 of Sir Anthony Blunt, the surveyor of the Queen's pictures, as a Soviet spy.

The confirmation that Stonehouse was a paid spy for the Czechs also makes him the only British politician to have acted as a foreign agent while a minister.

He served in Harold Wilson's government in the 1960s. In 1974, faced with serious business problems, he abandoned his wife, faked suicide by leaving his clothes on a beach and disappeared with his mistress to Australia.

The Stonehouse affair coincided with the first television series of Reggie Perrin, who also disappeared by running into the sea, and helped the phrase "doing a Reggie Perrin" into the language. Stonehouse was later tracked down and sentenced to seven years for theft and fraud.

Downing Street papers show that Havers told Thatcher that "he was sure that Mr Stonehouse had been a spy for the Czechoslovaks but he had no evidence which he could put before the jury".

He said Stonehouse had twice denied the allegations when they were put to him in the late 1960s and had since then served his prison sentence and had undergone open heart surgery. "If he was interviewed again and confronted with further evidence, it was quite likely he would make a public fuss and claim that he was being persecuted by the government," said Havers, adding that MI5 did not think there was anything to gain by confronting him.

A confidential minute from the cabinet secretary, Sir Robert Armstrong, said the Czech defector claimed to have been Stonehouse's controller in the late 1960s. The defector said a Czech security file stated that Stonehouse was a "conscious paid agent from about 1962" and had "after taking office in 1964 provided information about government plans and policies and about technological subjects including aircraft, and had been paid over the years about £5,000 in all".

This goes further than recent disclosures about Stonehouse, an aviation minister and postmaster general, which suggested that he was useful to the Czechs only as a backbench MP.

In the Downing Street meeting, Armstrong told Thatcher that the case for confronting Stonehouse turned on the possibility of a leak from the unnamed defector who was then in the United States "and of subsequent accusations against the government that there had been another cover-up to save people in high places. Just as there had been in the Blunt case. It would obviously helpful to be able to say that Stonehouse had been confronted with the new information in an attempt to get him to confess."

Armstrong conceded that, unlike the Blunt case, there was no question of offering Stonehouse immunity from prosecution and, if the story leaked, the government would have to say there wasn't sufficient evidence to prosecute him.

The Downing Street file records that Thatcher said that since the defector had not provided information which could be used as evidence, she agreed he could not be prosecuted. "Moreover, the balance of argument was against interviewing him and confronting him with the new information. Matters should therefore be left as they were." Stonehouse died on 14 April 1988 without the spy rumours being publicly confirmed.