If more resources had been in place sooner the chances of preventing the July 7 attacks on London could have increased, an official report concluded today.
The report by the cross-party Intelligence and Security Committee also said: "More needs to be done to improve the way that the Security Service and Special Branches come together in a combined and coherent way to tackle the 'home-grown' threat."
The chances of preventing the July 7 attacks might have been greater had different investigative decisions been made by the Security Service, the report said.
The committee also recommended a more transparent threat level and alert system and warned that there would be an "inevitable" rise in intrusive activity by security services in the face of the terror threat.
The report was published as the security service MI5 announced that it was suspending its work on serious crime cases to focus its resources on preventing international terrorism.
Michael Henning, a broker from Kensington, west London, who survived one of the bombings, said it was a "scandal" lack of resources may have allowed the attacks to happen.
Mohammed Sidique Khan, the ringleader of the four suicide bombers who carried out the attacks on London's public transport system, was not fully investigated despite being known to security officials.
Soon after the attacks, in which 52 people died, it emerged that Khan had been under surveillance by British intelligence.
But MI5 officers assigned to investigate him were diverted to another anti-terrorist operation.
The report confirmed that Khan, a former classroom assistant from Dewsbury, West Yorkshire, was known to the security service before July last year.
However, it said his true identity had not been revealed and it was only after the attacks that the service was able to identify Khan.
It had come across Khan and another of the bombers Shehzad Tanweer on the periphery of other surveillance operations.
However, the report said: "As there were more pressing priorities at the time, including the need to disrupt known plans to attack the UK it was decided not to investigate them further or seek to identify them.
"When resources became available attempts were made to find out more about these two and other peripheral contacts but these resources were soon diverted back to what were considered to be higher investigative priorities."
The chances of uncovering plans for the attack and preventing the bombings might have been greater had different decisions been taken by the service between 2003 and 2005, the report concluded.
However, it added: "Nonetheless we conclude that in light of the other priority investigations being conducted and the limitations on security services resources the decisions not to give greater investigative priority to these two individuals were understandable."
The committee recommended a revamp of the terror alert system but said it should recognise the limitations of intelligence gathering and that attacks may be at the planning stage without being detected.
"We recommend that these limits are reflected in a more standardised and formalised way within the threat level system and in all threat level reports," it said.
"This will help avoid inappropriate reassurance about the level of threat in the absence of intelligence of a current plot."
Regarding the "home-grown" terror threat the committee said it was "concerned that more was not done sooner".
Improvements made since July 7 to the intelligence and security agencies had shown that there "had been room to do more and to do it more quickly than had been thought possible at the time".
In a key passage of the report, the committee said: "The story of what was known about the July 7 group prior to July indicates that if more resources had been in place sooner the chances of preventing the July attacks could have increased.
"Greater coverage in Pakistan, or more resources generally in the UK, might have alerted the agencies to the intentions of the July 7 group."
The MPs warned that even if the security services go on to carry out more intrusive work to combat the terror threat it seems "highly unlikely" that it would be possible to stop all terror attacks.
The report revealed that in a review of its records after the attacks, the security service MI5 found it had a telephone number belonging to July 7 bomber Germaine Lindsay on file.
The report said the security services have discounted the theory that a terror mastermind fled Britain shortly before the attacks.
There is no intelligence to indicate there was a fifth or further bomber, it added.
But the extent to which the attacks were planned, directed or controlled by contacts in Pakistan or elsewhere remained "unclear", the committee said.
The report also said the intelligence and security agencies currently have "no evidence" of direct links between the July 7 attacks and four further failed attacks on London transport targets on July 21.
The report revealed that after the July 7 attacks Khan was identified as one of a number of men from the UK who had travelled to Pakistan in 2003 and sought meetings with al Qaida figures.
Khan also spent time there with Tanweer from November 2004 to February 2005, the report said.
The ISC also revealed details of another report from a source which was given to the security service in February last year, several months before the bombings
The report apparently stated that a man had travelled to Afghanistan in the late 1990s/early 2000s with another man and that both held extremist views.
This was investigated at the time, without significant result.
However, after the attacks the source identified one of the men as Khan.
The committee's report went on to address the lowering of the threat level from severe general to substantial just prior to the attacks.
The decision was "not unreasonable" on the basis of the intelligence available at the time, the ISC said.
It added: "There was no specific intelligence of the July 7 plot nor of any other group with a current credible plot."
However, a judgment by the Joint Intelligence Committee in March last year that suicide attacks would "not become the norm in Europe" could have impacted on the alertness of the authorities to the threat and their ability to respond, the report said.
The bombs which killed 52 innocent people were "almost certainly detonated manually by the bombers themselves in intentional suicide attacks", the report said.
There had been speculation that some of the bombers were unaware they would die.
The report revealed that the bus bomber Hasib Hussain stopped to buy batteries before boarding the vehicle.
"It is possible that this indicates he had difficulty setting off his device," the report said.