Sir John Kerr, the Permanent Under-Secretary to the department, had said he thought the Foreign Office minister Tony Lloyd was briefed that Customs and Excise were investigating Sandline before a Commons debate in March.
Later, though, both he and Mr Lloyd put out statements saying that this was not true. Mr Lloyd has repeatedly maintained that he did not know about the investigation until much later.
Mr Lloyd told the Commons in March that reports of meetings between a firm of mercenaries and the British High Commissioner to Sierra Leone, Peter Penfold, were "ill-informed and scurrilous."
It has since been confirmed that Mr Penfold did indeed meet Sandline International.
Last night, Sir John appeared to be in trouble for the second time in three days. He was rebuked by the Public Accounts Committee on Tuesday for suggesting that officials engaged in plea-bargaining with an accountant who stole more than pounds 100,000 from the British embassy in Jordan.
Meanwhile, the furore over allegations that officials collaborated with the mercenaries in breaking an arms embargo while planning to reinstate President Ahmad Tejan Kabbah to power in Sierra Leone showed no sign of abating.
When asked if Mr Lloyd's briefing pack contained information about the inquiry, he told the committee: "I think it did."
But later he wrote to the committee chairman, Donald Anderson, to say: "I have checked my memory of the briefing pack ... it mentions reports about a possible deal by President Kabbah for Sandline's services.
"But it does not mention arms shipments, and as I thought it does not say that one such report had already been passed to Customs and Excise."
In a separate statement, Mr Lloyd said: "I was not then briefed, told, advised or in any other way informed either orally or in writing either of alleged arms shipments or of the Customs and Excise investigation."
Sir John also told MPs yesterday morning that he discovered Foreign Office officials were being dragged into the scandal in early April.
However, he did not think it important enough to tell the Foreign Secretary, Robin Cook. Sir John described the allegations against his staff as "housekeeping matters".
"It would be quite wrong to create a situation where everybody who wishes to cough in the Foreign Office has to push a paper to ministers," he said.
Sir John added that officials had only one meeting with Tim Spicer, Sandline's chief executive, though they had received a number of telephone calls from him.
"He might have some intelligence that would be useful to us. These conversations were one-way - he rang a number of times. It is clear to me that the department decided not to put the phone down on Spicer because they wanted to hear what he had to say about the situation in Sierra Leone," Sir John said.
Menzies Campbell, the Liberal Democrats' foreign affairs spokesman, said an independent inquiry should be launched as soon as possible.
"These events are now taking on an Alice in Wonderland dimension. The conduct of the Foreign Office is curiouser and curiouser," he said.Reuse content