Both men have given contradictory accounts of a conversation which led to William Waldegrave, former Foreign office minister, being told MI6 believed machine tool exports by the Matrix Churchill company were for civilian purposes.
The MI6 assessment contradicted earlier intelligence which warned that the lathes were for Saddam Hussein's missile programme. As a result, Mr Waldegrave was unable to resist pressure from Trade and Defence ministers to permit the exports in 1989.
Simon Sherrington, a former Iran desk officer in the Foreign Office, told the inquiry yesterday an MI6 officer referred to as Mr O, said latest intelligence suggested the lathes were to help rebuild Iraq's war-ravaged industry.
As a result he wrote a briefing to Mr Waldegrave saying the arguments for preventing the exports were 'finely balanced', referring to an organisation that 'is now dedicated solely to the post-war reconstruction of Iraq'.
He insisted the words were based on the latest intelligence given to him by Mr O, checked verbally with the intelligence officer before going to Mr Waldegrave. He said he also sent a draft copy to Mr O and at no time did anyone in MI6 challenge the report's conclusions.
Mr Sherrington's claims are contested by Mr O in written evidence. Christopher Muttukumaru, the inquiry Secretary, said: 'Certainly there is a dispute about the nature of the assessment and whether it was checked prior to the submission going to ministers.'
The hearings resume later this month.