The issue has been seized on by rebel Labour councillors who this week set up their own party, depriving the official Labour Party of its majority in the north-east London borough.
The special council meeting finally voted at 1am yesterday to set up an inquiry into why Mark Trotter, a local Labour activist, was employed as a care worker at a children's home in Hackney.
Trotter died of an Aids-related illness last year, just before the police told Hackney council they had been poised to prosecute him for sexually abusing five boys in 1980-81 when he lived in Merseyside.
A Labour spokesman told The Independent the issue had been exploited as part of the "foulest sort of political game" by the rebel councillors, who were looking for an excuse to set up a rival party in Hackney.
But Philip Pearson, one of the 17 rebels who call themselves the Hackney New Labour Group, said: "This has been a double blow for Tony Blair. He and his cronies on the [Labour] National Executive are backing the wrong Labour group in Hackney."
The rebels, some of whom had already been disciplined by the National Executive for operating a "party within a party" called the Manifesto Group, accused the council leadership of delay in looking into the Trotter affair, and of trying to avoid a full independent inquiry.
The official Labour Party fought back yesterday. It pointed out that the two councillors who chaired the social services committee and who had known about the Trotter allegations since August last year, are both rebels. A Labour spokesman insisted that the council leadership decided to set up an independent inquiry as soon as the allegations were made known to the whole council two months ago.
And it was claimed that Cynthia Thomas O'Garrow, an elderly councillor who suffers from cataracts, was induced to sign a letter saying that she was joining the rebels after being told that it was demanding an inquiry into the Trotter charges. She later withdrew it.
The political effects of this week's defection by the Labour rebels are likely to be surprisingly limited. Despite claims by Hackney New Labour to have "forged links with" the 10 Liberal Democrats and eight Conservatives on the council, it seems the opposition parties will have nothing to do with the breakaways. The official Labour Party, led by a reinstated John McCafferty, seems set to go on running the council.
Local government in Hackney has been an embarrassment to democracy for three decades. Against a background of the tortured politics of the Hackney Labour Party, fraud and incompetence have flourished. Controversy in recent years has focused on the role of Bernard Crofton, the "fraudbusting" housing chief portrayed equally as part of Hackney's problem and as part of its salvation.
One former Labour activist in Hackney must be hugely relieved that he failed to become a councillor. In 1982 he put himself forward to be a Labour candidate, but was not selected. Twelve years later, Tony Blair was leader of the Labour Party. Now he might have to clean up the mess in government.