The Government was warned more than a year ago by the most senior official in the Foreign Office that the war in Iraq was fuelling Muslim extremism.
The warning contrasts with Tony Blair's insistence before and after the July 7 terrorist attacks that the American-led war on terror had not made Britain more of a target for al-Qa'eda.
His argument that extremism was already deep-rooted, and that therefore the attacks would have happened anyway, was not shared at the highest levels in Whitehall.
A letter written in May last year by Sir Michael Jay, permanent secretary at the Foreign Office, to Sir Andrew Turnbull, then Cabinet secretary, said British foreign policy was a "key driver" behind recruitment by extremist Muslim groups.
"Colleagues have flagged up some of the potential underlying causes of extremism that can affect the Muslim community such as discrimination, disadvantage and exclusion," Sir Michael wrote in the document leaked to The Observer.
"But another recurring theme is the issue of British foreign policy, especially in the context of the Middle East peace process and Iraq."
Sir Michael added that "British foreign policy and the perception of its negative effect on Muslims globally, plays a significant role in creating a feeling of anger among the younger generation of British Muslims."
The Foreign Office refused to comment on the leak but did not challenge the letter's authenticity.
Liam Fox, the shadow foreign secretary, said that the Government's handling the question of a connection between the war and Muslim extremism had been "inept from start to finish". News Telegraph
He said: "The Government denies there is any link when most people, with common sense, would say there is some link that makes it easier to recruit extremists."
Sir Menzies Campbell, for the Liberal Democrats, said: "The reasons for the terrible events of July 7 are very complex indeed and it is not simply a question of competing ideologies as the Prime Minister would argue."
Last month Jack Straw, the Foreign Secretary, realised the Government was rowing against the tide of public opinion by denying that there was a link. Asked if he stood by Mr Blair's line that the terrorists would have struck anyway, he said: "It is impossible to say for certain, News Telegraph reported.