The multi-millionaire owner of Harrods invited Prince Philip to sue him over the allegation and said he had already written to the Prime Minister, the Foreign Secretary and the Home Secretary asking for an investigation into alleged conspiracy.
Mr Fayed also claimed that the former Conservative cabinet minister Michael Howard had accepted between "pounds 1m and pounds 1.5m" in bribes in return for a critical Department of Trade and Industry (DTI) inquiry into the Egyptian- born tycoon's takeover of the House of Fraser stores and Harrods.
Mr Fayed's accusations came while he was giving evidence for the second day in the libel action brought against him by the former Conservative minister Neil Hamilton over claims that he had asked questions in the Commons in return for cash and other gifts.
In a series of acrimonious exchanges, Desmond Browne, QC, for Mr Hamilton, asked Mr Fayed: "Did you not say that Prince Philip had masterminded the deaths because he had German blood and Nazi views?" Mr Fayed responded: "I have the right to say what I feel and what I believe. I have a lot of support from the public, I receive millions of letters.
"Let Prince Philip sue me, let MI5 and MI6 sue me... they think they are above the law... Prince Philip knows what happened, I shall find the truth. I have already written to the Prime Minister, the Home Secretary and Foreign Secretary... I shall find the truth."
He continued: "I was close to Princess Diana I know what happened to Princess Diana over 20 years of marriage. I know what Prince Philip did to her."
Mr Fayed also claimed that criticism of him in the media was motivated by politics and orchestrated by the Establishment. He said he had been frequently attacked by "right-wing newspapers" and a prominent editor who he accused of working for the security services.
He continued: "I have been attacked over 300 times by the Sunday and Daily Telegraph, why? That Dominic Lawson [editor of The Sunday Telegraph] works for MI6, his brother-in-law works for MI6."
Referring to the DTI report into the Harrods purchase, Mr Browne said that Michael Howard had earned Mr Fayed's "undying enmity" for appointing the inspectors in April 1987. Mr Browne said the accusation that Mr Howard had been bribed by Tiny Rowland, head of Lonrho and Mr Fayed's rival for Harrods and the House of Fraser, was "utterly baseless".
Mr Fayed responded: "Why are you so sure it was baseless? I am the person who knows exactly how it happened - a million pounds and half a million. He was paid through his uncle Harry Landy, who is a crook. I have challenged Mr Howard to sue me, I have called him a crook. If he had any dignity or honour and knows he hasn't committed a crime, he would sue me."
Mr Browne said the DTI report in July 1998 found that Mr Fayed and his brothers had dishonestly misrepresented their origins and wealth, business interests and resources to the Secretary of State, the Office of Fair Trading, the press, the House of Fraser board and shareholders, and their own advisers.
Mr Fayed said he did not accept the findings, adding that the "naive inspectors built on what Tiny Rowland put to them. There is no documentation, no proof. It was all built on hearsay - Tiny Rowland's lies and corrupt witnesses. The findings are not acceptable, not credible, because I'm not able to cross-examine witnesses who have been paid millions."
The Harrods owner added that the report had been sent to various regulatory bodies, the police and the Director of Public Prosecutions, but he has never been questioned by them, let alone charged, over it.
Stressing his view that British politicians had low morals and were susceptible to corruption, Mr Fayed said: "You saw again exactly that yesterday... somebody who wants to be mayor of London... another British politician."
The judge, Mr Justice Morland, interposed: "The jury I am sure are fully aware of the fact that the Archer case has nothing to do with this case."
Mr Fayed then made a reference to Jonathan Aitken. Mr Browne said: "Are you trying, by dragging in these references to Lord Archer and Mr Aitken, to taint Mr Hamilton?" Mr Fayed replied: "It's just to confirm that he is not the only person."
The hearing continues.