MI5 deceived MPs by claiming the July 7 bombers had not been identified before carrying out their deadly attacks, a court heard today.
In May 2006 the Parliamentary Intelligence and Security Committee (ISC) said security agencies came across two of the men in 2004 during other investigations but did not identify them.
But a second ISC report, published in May 2009, revealed that the police and MI5 in fact held a series of records relating to Mohammad Sidique Khan, the ringleader of the 2005 London bombings.
A hearing at the Royal Courts of Justice in London to decide the format of the inquests for those killed in the attacks was told that MI5 misled the British public.
Patrick O'Connor QC, counsel for four of the bereaved families and 15 survivors, said: "This is a serious allegation to make.
"The last time MI5 was accused of deception... the ceiling seemed to fall in, as if MI5 is incapable of deception. They aren't, and they deceived the ISC."
He went on: "MI5 left the ISC under this misunderstanding - and therefore the British public - for three years, thinking they had not identified Mohammad Sidique Khan before the 7/7 bombings."
He said the ISC's findings would be "deeply undermined" if MI5 had deliberately misled the committee.
Mr O'Connor strongly criticised MI5's involvement in the July 7 case, saying the agency demonstrated flaws in its assessment policy, record-keeping and co-operation with other agencies.
He said of the second ISC report: "We submit that by contrast with its simple conclusion exonerating MI5, the material detailed in it exposes a profound criticism of MI5 and raises many more questions than answers...
"Those criticisms may well arguably become very considerably more powerful upon a proper analysis of the primary material."
Khan and three other suicide bombers killed themselves and 52 innocent people when they detonated their devices on three Tube trains and one bus on July 7 2005.
The coroner, Lady Justice Hallett, is holding a three-day legal hearing to decide what form the inquests - expected to start in October - should take.
Lawyers for the families of those who died argue that they should include a broad-ranging investigation of whether the authorities could have prevented the attacks.
Neil Garnham QC, counsel for the Home Secretary and MI5, urged the coroner not to examine how the security service dealt with the limited information it had about the bombers before the attacks.
He argued that the ISC report was an "effective investigation" into MI5's involvement.
He said: "The public interest would, we submit, not be served - in fact would be positively damaged - by attempts in these inquests to reinvestigate the matters that were before the ISC."
Mr Garnham also suggested that national security could be damaged if the inquests attempted to delve deeper into MI5's activities.
He said: "Nothing more of the information revealed to the ISC by the security service can safely be put into the public domain or disclosed to the interested parties than is revealed by that ISC report."
The hearing was adjourned until tomorrow.