Earlier this year Mr Prescott, Secretary of State for Environment, Transport and the Regions, rejected an application from the local football club to develop a small stadium on the Copthall site in the north London borough of Barnet, which borders Hertfordshire, on the grounds that the land is classified as green belt.
Despite the rejection of the original stadium, documents leaked to the Independent on Sunday show that the Government Office for London (GOL), a regional government department responsible for co-ordinating the capital's affairs, has drawn up plans for an Olympic aquatic stadium and training centres for swimmers on the site.
The GOL operates within the Department of the Environment, Transport and the Regions (DETR) and is answerable to Mr Prescott.
Building an Olympic stadium would intensify pressure in the South-east, one of the key areas targeted to supply some of the 4.5 million new homes needed across the UK by 2015.
Opponents argue that should the new stadium, which would form part of the Government's bid for the 2008 or 2012 Olympic Games, get approval, it would create a precedent, making it easier for developers to overturn planning decisions that go against them, citing Copthall as an example.
Mr Prescott turned down the original proposal from Barnet FC on the advice of his officials in the GOL.
Third-division Barnet were required to upgrade their ground or move to a new site in the wake of the Taylor report into football stadiums after the Hillsborough disaster of 1989. They planned to relocate to Copthall and redevelop an existing 9,999-seater athletics stadium into a multi- sports complex.
The club received permission from the local authority but a public inquiry was called after residents of the well-heeled London suburb of Mill Hill objected. The scheme was then rejected on the grounds that it would adversely affect the green belt on which the stadium is built and cause traffic congestion, even though the site is framed by the A1, the M1 and the A41, three major thoroughfares.
"This is staggering hypocrisy," said Michael Edwards, chairman of a campaign by the club's supporters to overturn the decision to block the club's move to Copthall. "The Government wants to dress up Copthall for the Olympics bid and it's prepared to ride roughshod over the rules which we've followed. How could they make a fair decision on our case when they were already drawing up plans for an even bigger stadium? Our plans for a 10,000-seater complex were unsuitable but a 15,000-seater stadium is fine.
"The club did everything by the book, spent pounds 500,000 on its application and has been in limbo for three years. Now it turns out we were never going to get permission anyway."
A spokesman for the DETR said that no formal application had yet been received for a new stadium at Copthall. "If an application is received it will be dealt with on its merits," he said.
"The football club's plan for Copthall was rejected for no other reason than that it would have infringed green belt and raised transport campaigns. There was no conspiracy."
But the move has alarmed green belt campaigners in Stevenage, 25 miles further up the A1, where there are plans for 10,000 new homes. An enhanced stadium at Copthall would create a dangerous precedent, according to John Davies, who has been involved in opposing the housing plans in Stevenage and elsewhere in rural Hertfordshire.
"The green belt really is a wedge that gets tighter and tighter as the A1 and M1 head towards London," he said.
"This area has been vigorously protected and we look to central government to continue doing that. The general idea of a new stadium in the area is a thoroughly bad one. When an application for a smaller stadium has been rejected a plan for an even larger one just seems perverse."