MI5 dismissed the July 7 ringleader as a Jihadi "tourist" when he travelled to Pakistan to attend a terrorist training camp, an inquest heard today.
Mohammed Sidique Khan attended a "social" breakfast gathering at Islamabad Airport, along with fertiliser bomb plotter Omar Khyam in 2003.
However, the meeting, which took place while the Security Service was tracking Khyam, failed to arouse suspicions.
Al-Qa'ida supergrass Mohammed Junaid Babar later told the FBI how he met Khyam and two individuals, known to him as "Ibrahim" and "Zubair" at the Pakistan airport.
But he was only able to identify Ibrahim as Khan after 7/7.
Another source - referred to as Detainee 2 - reported that Ibrahim and Zubair had been sent to Pakistan on a "fact finding" mission by Mohammed Quayum Khan, a suspected extremist.
But a top-level spy, referred to only as Witness G, said this information "didn't appear all that significant".
"A phrase that is used in the Service than and is still used, is the phrase Jihadi tourism," he said.
"Individuals go to Pakistan to have a look and see what's going on, and the material from Detainee 2 would have tended, at that point, to suggest that perhaps that's why they were going."
Interviewed in May 2004, Babar said he was at Islamabad Airport to collect some individuals ahead of a training camp.
While they were there, they met two men from West Yorkshire who he knew to be Ibrahim and Zubair and the group had breakfast together.
Asked to describe how the meeting would have been viewed by MI5, Witness G said: "It would have been seen as a social gathering, but a social gathering of those who are like-minded extremists".
The inquest has heard how MI5 missed an opportunity to identify Khan when they failed to show Babar, their key informant, a photograph of the July 7 bomber.
He and his deputy, Shehzad Tanweer, were photographed by a surveillance team in front of a Burger King outlet at the Toddington Services on the M1 in Bedfordshire on February 2 2004.
But instead of using this sharp colour picture, MI5 provided only a very badly cropped image of Tanweer to US investigators interrogating the supergrass.
A photograph of Khan was also edited but it was never shown to Babar - apparently because the quality was so poor.
Hugo Keith QC, counsel to the inquest, said: "The best photograph would, in retrospect, in hindsight, appear to have been the one taken from February 2, the one of Khan and Tanweer together in the Toddington service station, in the Burger King restaurant, but that was the one that was cropped?"
Witness G replied: "Correct".
Some of the photographs which MI5 did present to their sources for identification purposes were shown to the inquest.
These were largely black and white and often quite unclear.
Though MI5 showed photographs of Khan and Tanweer to Detainee 2, he, like Babar, was unable to recognise Khan, or link him to the meeting in Pakistan in July 2003.
Asked the significance of this "negative result", Witness G said: "There was no indication that, you know, they had been out in Pakistan from two sources who should have known."
This, he said, meant there was nothing to increase their "prominence or significance" as Security Service targets.
MI5 reached the conclusion that there were therefore "no good grounds" for supposing that Khan was in any way connected to Ibrahim, the inquest was told.
A major parliamentary inquiry into whether the 7/7 attacks could have been prevented included a misleading description of how MI5 categorised suspects, the inquest heard.
The report by the Intelligence and Security Committee (ISC), published in May 2009, said the Security Service divided people of interest into "essential", "desirable" and "other".
MI5 judged Khan and Tanweer to be "desirable" targets after they were seen meeting Khyam in the UK on four occasions in February and March 2004, the report said.
But Witness G admitted today that "essential" and "desirable" were not categories employed operationally by Security Service officers, although they were used for making funding bids to Whitehall.
In fact no terms were used to categorise Khan and Tanweer, the inquest heard.
Witness G said the words "essential" and "desirable" were used in the ISC report as a "term of art" and MI5 did not object to them.
Patrick O'Connor QC, counsel for the bereaved families, asked him: "Could it be that the Security Service was reluctant to have it revealed publicly in this very important report that you didn't have a structured approach to assessments?"
Witness G replied: "No."
Mr O'Connor suggested MI5 made a "crucial mistake" by concluding that Khan was not planning an attack simply because surveillance officers had never picked up any such conversation.
"The distinction between what you detect and what was actually happening - you can't conclude, can you, that there was no discussion of attack planning?" he said.
Witness G replied: "We can't conclude with certainty."
The inquest was also shown a police mugshot of Khan taken when he was arrested and cautioned in February 1993, aged 18, for an assault committed the previous Boxing Day.
The photograph was sent to MI5 in July 2004 but it was not compared to the surveillance pictures taken at Toddington Services or shown to Babar or Detainee 2, the hearing was told.
The July 7, 2005 bombings on three Tube trains and a bus carried out by Khan, 30, Tanweer, 22, Hasib Hussain, 18, and Jermaine Lindsay, 19, were the worst single terrorist atrocity on British soil.
As well as killing themselves and 52 others, the bombers injured more than 700 people.
The inquest at the Royal Courts of Justice in London was adjourned until tomorrow, when Witness G is expected to complete his evidence.Reuse content