The extent to which the former Labour government tried to play down criminality and extremism among British Muslims for fear of undermining community cohesion is revealed today, as the fallout from the Rotherham sex abuse scandal continued.

The publication last week of Professor Alexis Jay's report into grooming by Muslim gangs in Rotherham has triggered widespread criticism over how much the council and the police knew about the abuse more than a decade ago.

The Independent on Sunday can reveal that a House of Commons committee is to investigate what Tony Blair's Home Office knew about the Rotherham scandal as far back as 2001 after more evidence emerged about his government's efforts to pacify Muslim communities.

Meanwhile, a former minister claimed he was threatened with the sack by his then boss, the foreign secretary Jack Straw, for calling on Muslims in the UK to choose between the "British way or the way of the terrorists" after a 24-year-old from South Yorkshire tried to bomb Israelis in a bar in Tel Aviv in 2003. Former Foreign Office minister Denis MacShane said he was forced to agree to a "grovelling climb-down" over his remarks because he was warned it risked upsetting community relations.

In a bizarre twist, it also emerged that Mr MacShane was disciplined for his remarks following protests led by one of the Muslim politicians at the centre of the child-grooming scandal in Rotherham.

Sources revealed that the July 2001 race riots in Bradford, Burnley and Rochdale marked a "turning point" in the way that Mr Blair's government responded to Britain's Muslim communities, and that there were efforts – more in "good faith" than in an attempted cover-up – to play down examples of disunity.

David Blunkett, who was Home Secretary from 2001 to 2004, seemed to support this claim when he said yesterday that the 2001 riots "and the knock-on [effect] elsewhere had an impact on the way in which people saw these issues in race terms".

At the same time, it is now known that a Home Office researcher was conducting an investigation into trafficking and underage prostitution by mainly Muslim gangs in Rotherham, but it was never published, and the files were seized in 2002 by the Labour-run council when she tried to blow the whistle. The researcher faced intimidation by the police and council officials, the report by Professor Jay revealed last week.

Last night, Keith Vaz, chairman of the Home Affairs Select Committee, said he would ask the Home Secretary, Theresa May, how much the Home Office knew at the time.

"We would be very keen to get from the Home Office a full and frank response to the research that was commissioned in 2002. This is an essential part of the jigsaw to determine why the council failed to act, and whether the Home Office could have done more to ensure that it did act," he said. "We want to see every piece of information the Home Office holds on this, and I will be writing to the Home Secretary to ask that the databases are searched to see what files it holds on this horrific behaviour in Rotherham."

Local council officials are to be called before the Commons Home Affairs committee about the suppressed 2002 report and the wider issue of the abuse of girls.

While there is no suggestion that Mr Blunkett or his close advisers knew about the 2002 Rotherham report, sources said the Government was obsessed with keeping the Muslim community onside – even if it meant sidestepping serious criminality and extremism.

Mr MacShane, who was MP for Rotherham until last year, said he tried to make a speech in his constituency in 2003 when, as Foreign Office minister, he was horrified that a suicide bomber from Derby had travelled to Israel to try to blow up Jews but ended up killing himself. The speech was also days after the terrorist attack on the British consulate in Istanbul which killed dozens, including a UK diplomat.

Mr MacShane planned to say it was "time for the elected and community leaders of British Muslims to make a choice: the British way, based on political dialogue and non-violent protests, or the way of the terrorists against which the whole democratic world is uniting". However, there was uproar from sections of the Muslim community led by councillor Jahangir Akhtar in Rotherham, who labelled Mr MacShane's comments "absolutely disgraceful".

Last year, Mr Akhtar resigned as deputy leader of the council after The Times reported that he had been involved in a extraordinary "deal" to recover a missing pregnant 14-year-old who had been with a distant relative of his. A subsequent police investigation cleared Mr Akhtar of wrongdoing. Until recently he was Labour's local campaign manager.

In an article for HuffingtonPost.co.uk earlier this month – before the publication of the Jay report – Mr MacShane wrote that his comments on Islamic extremism caused a "great kerfuffle" in the Foreign Office.

"Jack Straw spent an inordinate amount of time cossetting his Muslim constituents in Blackburn. He had brought in an official from the Muslim Council of Britain to advise the FCO on outreach to Islamist outfits like the Muslim Brotherhood in Egypt," he said. "To attack their values was heresy. I was told I was close to being fired as a minister unless I signed some grovelling climb-down, which, as a coward, I did."

Yesterday Mr Blunkett told the Today programme: "There are people who need to be held to account, whether it is in Rotherham or Rochdale or elsewhere, for their sheer neglect, managerial neglect. We need to be absolutely clear about the terms we lay down for local people to deal with all of these local issues, because we cannot do it all from the centre. We couldn't, in the aftermath of the riots in 2001... Incidentally, and I am very careful to say this, I think what happened in Bradford, Burnley and Oldham and the knock-on elsewhere had an impact on the way in which people saw these issues in race terms, and I think that is a great shame."

A spokesman for Mr Blunkett said he had "no knowledge of any Home Office official having any hand" in suppressing concerns about in Rotherham. And he pointed out that Mr Blunkett had worked with the then Labour MP Ann Cryer, who had first raised issues of sex trafficking among Muslim gangs a decade ago, to tighten the Sex Offences Act.

The spokesman added: "In 2003, against considerable opposition, Mr Blunkett introduced the Sex Offences Act which substantially strengthened the law, and in particular protection for under-16s. The publicity at the time reflected scepticism by opponents in respect of the emphasis that adults would always be culpable for sex with those under the age of 16. This action reflected a genuine desire to send messages to all those responsible at local level, whether in local government or the police service, health, or youth service provision.

"Junior ministers were assiduous in promoting the importance of protection, including a working group on the prevention of grooming."