According to senior military and intelligence sources in Europe and the US the Chinese embassy was removed from a prohibited targets list after Nato electronic intelligence (Elint) detected it sending army signals to Milosevic's forces.

The story is confirmed in detail by three other Nato officers - a flight controller operating in Naples, an intelligence officer monitoring Yugoslav radio traffic from Macedonia and a senior headquarters officer in Brussels. They all confirm that they knew in April that the Chinese embassy was acting as a 'rebro' [rebroadcast] station for the Yugoslav army (VJ) after alliance jets had successfully silenced Milosevic's own transmitters.

The Chinese were also suspected of monitoring the cruise missile attacks on Belgrade, with a view to developing effective counter-measures against US missiles.

The intelligence officer, who was based in Macedonia during the bombing, said: 'Nato had been hunting the radio transmitters in Belgrade. When the President's [Milosevic's] residence was bombed on 23 April, the signals disappeared for 24 hours. When they came on the air again, we discovered they came from the embassy compound.' The success of previous strikes had forced the VJ to use Milosevic's residence as a rebroadcast station. After that was knocked out, it was moved to the Chinese embassy. The air controller said: 'The Chinese embassy had an electronic profile, which Nato located and pinpointed.'

The Observer investigation, carried out jointly with Politiken newspaper in Denmark, will cause embarrassment for Nato and for the British government. On Tuesday, the Queen and the Prime Minister will host a state visit by the President of China, Jiang Zemin. He is to stay at Buckingham Palace.

Jiang Zemin is still said to be outraged at the 7 May attack, which came close to splitting the alliance.The official Nato line, as expressed by President Bill Clinton and CIA director George Tenet, was that the attack on the Chinese Embassy was a mistake. Defence Secretary William Cohen said: 'One of our planes attacked the wrong target because the bombing instructions were based on an outdated map.'

Later, a source in the US National Imagery and Mapping Agency said that the 'wrong map' story was 'a damned lie'.

Tenet apologised last July, saying: 'The President of the United States has expressed our sincere regret at the loss of life in this tragic incident and has offered our condolences to the Chinese people and especially to the families of those who lost their lives in this mistaken attack.

Nato's apology was predicated on the excuse that the three missiles which landed in one corner of the embassy block were meant to be targeted at the Yugoslav Federal Directorate for Supply and Procurement, the FDSP. But inquiries have revealed there never was a VJ directorate of supply and procurement at the site named by Tenet. The VJ office for supplies - which Tenet calls FDSP - is some 500 metres down the street from the address he gave. It was bombed later.

Moreover the CIA and other Nato intelligence agencies, such as Britain's MI6 and the code-breakers at GCHQ, would have listened in to communication traffic from the Chinese embassy as a matter of course since it moved to the site in 1996.

A Nato flight control officer in Naples also confirmed to us that a map of 'non-targets': churches, hospitals and embassies, including the Chinese, did exist. On this 'don't hit' map, the Chinese embassy was correctly located at its current site, and not where it had been until 1996 - as claimed by the US and NATO.

Why the Chinese were prepared to help Milosevic is a more murky question. One possible explanation is that the Chinese lack Stealth technology, and the Yugoslavs, having shot down a Stealth fighter in the early days of the air campaign, were in a good position to trade. The Chinese may have calculated that Nato would not dare strike its embassy, but the five-storey building was emptied every night of personnel. Only three people died in the attack, two of whom were, reportedly, not journalists - the official Chinese version - but intelligence officers.

The Chinese military attache, Ven Bo Koy, who was seriously wounded in the attack and is now in hospital in China, told Dusan Janjic, the respected president of Forum for Ethnic Relations in Belgrade, only hours before the attack, that the embassy was monitoring incoming cruise missiles in order to develop counter-measures.

Nato spokesman Lee McClenny yesterday stood by the official version. 'It was a terrible mistake,' he said, 'and we have apologised.' A spokesman for the Chinese embassy in London said yesterday: 'We do not believe that the embassy was bombed because of a mistake with an out-of-date map.'