Mr Straw immediately ordered an inquiry into why the information was not made available to ministers. The Home Secretary is indignant that Bell has been able to make around pounds 50,000 from the book and is urgently looking at the law to stop other criminals profiting from their crimes in such a way.
Whitehall sources said yesterday that if ministers had been told of the book in March 1996, when officials first learned about it, they could have tried to stop the payment.
Tory MP Ann Widdecombe, who was a Home Office minister with responsibility for prisons when the book deal first became known, said yesterday she was "quite disgusted" that ministers had not been informed. She said: "One cannot have material of that order of magnitude known to officials and probation officers and not known by ministers."
Officials became aware of the book when Durham Probation Service passed information to the Prison Service Lifer Review Unit, which monitors released life sentence prisoners, who remain on licence for the rest of their lives.
The unit decided that the book project was not a breach of Bell's licence and took no action.
In a statement, Mr Straw said: "I deeply regret that ministers were not informed and were therefore not able to intervene. I have asked the Permanent Secretary to investigate what happened so we can learn lessons for the future."
Had the book project become public knowledge in 1996, Sereny amd publishers Macmillan would have been under great pressure to withhold the payment to Bell. Sereny said last night she had warned Bell against going ahead with the book, telling her to talk to a psychiatrist instead.
"I warned her against doing it, that it would be better for her to speak to a psychiatrist for her great desire to open herself, to reach inside herself, but she was determined to do this," she told Channel 4 News.
Mr Straw issued his statement after a meeting at the Home Office with June Richardson, whose four-year-old son Martin was Bell's first victim. She demanded Bell hand back the cash she was paid for her help with the book.
Bell and her 14-year-old daughter have been forced to flee their home on the south coast after being besieged by reporters. Tabloid newspapers yesterday carried interviews with Bell's boyfriend, who disclosed that the Home Office had known for some time that a book was planned. After the Home Office was asked to confirm this, an inquiry was launched.
The Press Complaints Commission said yesterday that it had launched an inquiry into a possible breach of its code of practice over payments made to Macmillan by the Times, which is serialising the book, Cries Unheard.
Clause 16 of the newspaper code of practice bans payments to agents or associates of convicted criminals unless there is an overwhelming public interest.
A decision is expected later today from the Attorney General John Morris on whether there is any means under existing law to block the payments to Bell.
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