The officer, known only by her undercover name of Lizzie James, has been off work for the past 18 months suffering from stress.
Her civil action alleges that she was not offered leave or professional support following her "traumatic" role in the investigation, and had suffered emotional problems as a result.
The 33-year-old married detective constable has spent 13 years with the Metropolitan Police. If she wins her legal action the compensation package and various benefits she is entitled to could add up to several hundred thousand pounds.
"Lizzie" befriended Mr Stagg in an attempt to get information which would incriminate him over the frenzied knife murder of Ms Nickell on Wimbledon Common, south-west London, in l992. The operation was so secret that the officer was ordered not to tell her husband, who also works for the Metropolitan Police.
The undercover officer posed as a disturbed woman looking for a partner to indulge in sometimes violent sexual fantasies. The pair built up a relationship in which Mr Stagg is alleged to have talked about sexual acts involving knives and bondage. His lawyers argued that he was enticed to do so by the policewoman.
The operation, supervised by forensic psychologist Paul Britton, came in for scathing criticism from Mr Justice Ognall at the Old Bailey when he threw out charges against Mr Stagg in l994. He said it was "a substantial attempt to incriminate a suspect by positive and deceptive conduct of the grossest kind".
The detective constable continued to work afterwards for Scotland Yard but began to suffer from stress when she learnt that Mr Britton planned to reveal details of her role in the inquiry in his memoirs. In the book, Mr Britton said she was ideal for the job because of her good looks, bubbly personality, and experience in infiltrating criminal organisations.
He wrote: "This time she was to be a damaged and deeply disturbed young woman, nursing a dark sexual secret and looking for a man who shared similar experiences."
Friends of "Lizzie" say that what she had to do had far-reaching consequences. Her marriage suffered, and she put on weight. "She was put in front of Stagg as a sex object and she doesn't want to be seen as sexy any more."
A spokesman for the Metropolitan Police Federation said it was backing the woman's legal action. "She has taken early retirement due to the trauma she suffered as a result of the role she played in the Nickell investigation," he said. "We are pursuing a civil claim against the Metropolitan Police Commissioner on the grounds that she was not offered sufficient support in dealing with the difficult experiences she went through."
Last night several newspapers were believed to be attempting to buy " Lizzie's" story. However, it is believed she has been advised not to get involved in a press deal while negotiations continue with the Metropolitan Police.Reuse content