FO warned Blair that war was fuelling Muslim anger

Opposition parties attacked Mr Blair's handling of the aftermath of the war after a leaked letter showed Michael Jay, permanent secretary at the Foreign Office, warned that the invasion was a "key driver of recruitment to extremist organisations". Mr Blair and Jack Straw, the Foreign Secretary, have repeatedly sought to play down the role of the war in motivating the July attacks on London, insisting that attacks inspired by al-Qa'ida took place years before the invasion.

But the letter from Mr Jay to the Cabinet Secretary, Sir Andrew Turnbull, leaked to The Observer, shows Downing Street was warned of the link between Iraq and Islamic extremism more than a year before the London attacks. Mr Jay warned that British policy in the Middle East and Iraq was a " recurring theme" in the underlying causes of extremism. The letter, dated 18 May 2004, warned: "British foreign policy and the perception of its negative effect on Muslims globally plays a significant role in creating a feeling of anger and impotence among especially the younger generation of British Muslims. This seems to be a key driver behind recruitment by extremist organisations."

An attached document warned that Britain was now viewed as a "Crusader state" and warned of Muslim resentment against the West. It said: " This was previously focused on the US, but the war in Iraq has meant that the UK is now seen in similar terms."

Liam Fox, the shadow Foreign Secretary, said that the Government had been "inept" by claiming there was no link between terrorism and the war. Sir Menzies Campbell, the Liberal Democrat foreign affairs spokesman, said the letter undermined Mr Blair's claims that terrorist attacks were not linked to the war.

Dr Fox told the BBC: "It's simply not sensible for the Government to say there's no link. What I think is surprising is that the Government denies there's any link ­ but the Government's handling of this has been rather inept politically from start to finish."

Sir Menzies said: "When a figure of such experience and authority as Michael Jay highlights the relationship between our foreign policy and disaffection amongst Muslims, the immediate question for the Government must be, what weight did they attach to his advice and what was their response? The continuing political and constitutional crisis in Iraq offers no antidote to Michael Jay's prescription."

Downing Street and the Foreign Office declined to comment.