A conservative "working" peer has made an astonishing claim that he handled billions of pounds of terrorist funds at the behest of the Bank of England during his business career, with the IRA as his "biggest client".

Lord James of Blackheath also claims that he is in touch with a secret organisation which he called Foundation X, with vast sums of money at its disposal, which is prepared to lend billions to the British government, interest free, to help reduce the deficit, but he has been unable to get ministers to believe him. His claims were ridiculed as coming from a man who has lost touch with reality when he voiced them in the House of Lords this week, but a government minister, Lord Sassoon, said that they had been the subject of "detailed discussions".

Lord James told peers: "I have had one of the biggest experiences in the laundering of terrorist money and funny money that anyone has had in the City. I have handled billions of pounds of terrorist money. My biggest client was the IRA and I am pleased to say that I managed to write off more than £1bn of its money. I have also had extensive connections with North African terrorists, but that was of a far nastier nature, and I do not want to talk about that because it is still a security issue. I hasten to add that it is no good getting the police in, because I shall immediately call the Bank of England as my defence witness, given that it put me in to deal with these problems."

He told peers that he was approached for or five months ago by a City firm, on behalf of "a strange organisation which wishes to make a great deal of money available to assist the recovery of the economy". Later, Lord James gave a figure of £75bn. He said: "I have come to the absolute conclusion that Foundation X is completely genuine and sincere and that it directly wishes to make the United Kingdom one of the principal points that it will use to disseminate its extraordinarily great wealth as part of an attempt to seek the recovery of the global economy."

He said that he had arranged for a representative of Foundation X to meet the leader of the House of lords, Lord Strathclyde, but that the meeting went so badly that" neither of them ended up by inviting the other out for a coffee or drink at the end of the evening, and they did not exchange telephone numbers".

Lord Strathclyde later told Lord James that the claims made about Foundation X could not be true, because all of their wealth is supposedly backed by gold bullion, which would imply they held more bullion than had been mined in the history of the world. Lord James, who is 72, said the total amount of bullion in the world may have been miscalculated, because "the total value of the Vatican bank reserves would claim to be more than the entire value of gold ever mined".

His claims were ridiculed by Lord Myners, the former City financier and Treasury minister. But the Treasury minister Lord Sassoon said: "Lord Myners thinks it is all a joke. I have been in detailed discussions with Lord James of Blackheath, and of course we take seriously anyone who wants to invest in our economy."

One Labour peer said: "This speech has been the talk of the bars in the House of Lords and the general view is that it is bonkers. If anything he said is true, it should be looked into, but we all think he's in a parallel universe."

As a businessman, David James had a reputation as a "company doctor" who was called in to take over enterprises that were on the brink of failure, including the Millennium Dome. In preparation for the 2001 general election, he was a member of an exclusive club of businessmen each of whom donated at least £10,000 a year to the Conservatives.

Michael Howard, David Cameron's predecessor, sent for him in 2004 to hold a review into how a Tory government might save £35bn a year by cutting Whitehall waste. The James Review of Taxpayer Value was praised by George Osborne as a "valuable exercise in identifying poor value for money". At Mr Howard's request, David Cameron arranged for James to be rewarded with a life peerage, as a working peer, in 2006.

Lord James said: "If it's all wrong you can blame it on this maverick ageing old-codger peer. And if I'm right, you get all the great glory of this happening for the British economy."

Baron James: In his own words

For the past 20 weeks I have been engaged in a very strange dialogue with two noble Lords, in the course of which I have been trying to bring to their attention the willing availability of a strange organisation which wishes to make a great deal of money available to assist the recovery of the economy in this country. For want of a better name, I shall call it Foundation X.

I have had one of the biggest experiences in the laundering of terrorist money and funny money that anyone has had in the City. I have handled billions of pounds of terrorist money.

My biggest client was the IRA and I am pleased to say that I managed to write off more than £1bn of its money. I have also had extensive connections with North African terrorists, but that was of a far nastier nature, and I do not wantto talk about that because it is still a security issue.

I brought one of the senior executives of Foundation X to meet my noble friend, Lord Strathclyde. I have to say that, as first dates go, it was not a great success. Neither of them ended up by inviting the other out for a coffee or drink at the end of the evening, and they did not exchange telephone numbers. I found myself between a rock and a hard place that were totally paranoid about each other, because the Foundation X people have an amazing obsession with their own security.

They expect to be contacted only by someone equal to head of state or someone with an international security rating equal to the top six peoplein the world.