MI5 fears terror war on streets of London: Intelligence warns of undercover battle as Israelis seek revenge for bombings

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INCREASING concern that the streets of London could become a battlefield for Israeli intelligence squads and Islamic extremist groups was privately expressed yesterday by British intelligence.

Senior analysts in the Security Service (MI5) believe the Israeli government's promise yesterday that it would 'hunt down' those responsible is a worrying, though predictable, development in the aftermath of the two bombs which exploded earlier this week.

Last night, John Major followed Israel in pledging an unending quest to bring the perpetrators of the outrage to justice. But he also emphasised Britain's 'deep respect' for Islam and the need for a new partnership between Britain and Europe and the Middle East.

An intelligence source told the Independent that the comment by the Metropolitan Police Commissioner, Sir Paul Condon, that the British authorities 'are at one with the Israeli agencies' was perhaps 'wish rather than reality'.

Scotland Yard, which last night issued a police artist's inpression of the woman seen leaving the car bomb outside the Israeli embassy, said the sophistication of the devices and the organisation required to plant two bombs containing 30 pounds of high explosives within 13 hours indicated months of planning. Senior officers also said the bombs represented the beginning of a 'wave' of terrorist attacks to be played out in the capital.

The Israeli cabinet statement that it 'condemns the bloodshed against innocent civilians, and declares it will act . . . to capture the criminals and punish them' was being interpreted in British intelligence circles as resulting in Israeli retaliation focused on Middle East fundamentalist strongholds and an increase in the activities of Mossad (the Israeli intelligence network) in Europe.

The Security Service fear what one source called a 'refereeing role' where claims of co-operation are belied by a covert no-holds- barred war.

A potential testing ground for the Police and intelligence services will be an Islamic conference scheduled for Wembley Arena in north-west London on 7 August. The International Muslim Khilafah, expected to attract 12,000 people, will be the largest gathering of its kind outside the Muslim world.

In a speech to the Middle East Council dinner in London, Mr Major announced the conversion of pounds 60m worth of Overseas Development Aid loans to Jordan to an outright grant as a 'powerful signal of our support' - but had few words of comfort for Iran.

The Prime Minister said: 'Terrorism has been directed at those who seek peace and progress in the Middle East . . . We must seek out its perpetrators and bring them to justice . . .'

He said: 'We deeply respect Islam. We do not regard it as a threat. It is completely wrong to equate the extremism of a few in the Middle East with the religion of Islam.' But he added: 'Iran is an important regional power. We would prefer a normal relationship with her. But many aspects of Iran's behaviour are simply unacceptable, and indeed threatening: on human rights, terrorism, her military and nuclear ambitions.'