The affair has prompted Labour accusations of "insider dealing" and "blatant underhand behaviour".
Until recently, Dr Wynn Anderson, 43, was a £35,000-a-year senior medical officer for the Occupational Health Service. He headed a team attached to the Atomic Weapons Establishment (AWE) at Aldermaston, Berkshire, testing workers for exposure to radiation.
When the Government put the atomic weapons occupational health service out to tender, as part of its market-testing programme, an in-house team from the Occupational Health Service put in a bid, as did Trident Medical Services, a new company formed by Dr Nicholas Lewis, an ex-Occupational Health Service employee.
The service tests the 7,000 staff at the Atomic Weapons Establishment centres in Burghfield, Cardiff and Foulness as well as Aldermaston.
The contract, worth an estimated £500,000 a year, was awarded last month to Trident. After Trident won, officials discovered Dr Anderson was one of the company's three directors. A spokeswoman at the Cabinet Office, which oversees the Occupational Health Service, said yesterday: "Dr Anderson was suspended on 20 March pending disciplinary action. He resigned on 23 March."
Dr Anderson now works at Aldermaston for Trident on the contract he helped the firm to win. Members of the in-house team, who have complained to their union, the IPMS, have had their jobs transferred to Trident, which took charge on 1 April.
Steve Jary, national officer of the IPMS, said his members were furious. "There was a suspicion about the bid from Trident. It was a new company and nobody had heard of it before. What was known, was that it was run by Dr Nick Lewis. The in-house team thought Trident had an advantage but that was because of Lewis's involvement. They did not know about Dr Anderson."
To add to their anger, Dr Anderson assisted on their in-house bid. "He was consulted on the bid; he was deeply involved in drawing it up," said Mr Jary.
Trident took charge on the first of this month. Mr Jary said it was incredible that such a sensitive contract could have been awarded without checks having been made on the winners.
A senior government source said that if Dr Anderson's directorship had been discovered at the time "he would have been suspended earlier".
Two Commons motions have been tabled by Rhodri Morgan MP. They "deplore the corrupt means used to privatise the occupational health service" of the AWE and accuse Dr Anderson of misusing his position of trust and "blatant insider dealing".
Mr Morgan said last night: "This underhand dealing makes a mockery of the market-testing process. This contract should be withdrawn forthwith since it was so blatantly won by underhand means. This was insider dealing at its worst."
The Government is thought to be unable to scrap the contract. The Cabinet Office said it was a decision for the AWE, which operates as an executive agency. Calls to Aldermaston were not returned. At Dr Anderson's home, his wife said he was busy at work.