Government blocked probe into 'Squidgy-gate' and 'Camilla-gate' affairs

The publication of lurid details of the taped conversations prompted a series of high-level meetings and correspondence in January 1993, the inquest into the death of Diana, Princess of Wales was told.

But after assurances were given that the Royal family had not been bugged by the security services, a decision was taken not to investigate further, the jury heard.

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Details emerged during evidence to the inquest from the Queen's former private secretary Lord Fellowes.

The jury has heard that a call between Diana and her friend James Gilbey in late 1989, while she was at Sandringham, was recorded.

The conversation, in which Mr Gilbey affectionately calls the Princess "squidgy", caused a sensation when it came to light in the media in 1992.

Although it was thought to have been the work of an amateur radio enthusiast, this was never definitively proved, the jury has heard.

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A separate conversation in the early 1990s between the Prince of Wales and the then Camilla Parker Bowles, now the Duchess of Cornwall, was also recorded and came to light around the same time.

Lord Fellowes told the court that the recordings had caused concern within Buckingham Palace.

"It would be wrong, I think, to say that the Queen 'demanded an inquiry' - it wasn't her habit to react in that way but to consult and to be informed by the best advice available," he said.

"There were two strands of thinking, one was obviously if there had been anything nefarious done that it should be discovered and punished.

"But the main strand of thinking in Buckingham Palace, if I put it broadly, was that this had happened and what action should be taken to ensure that it did not happen again."

Among documents he was then shown by counsel to the inquest Ian Burnett QC, was one detailing a meeting in January 1993 involving the then cabinet secretary Sir Robin Butler (now Lord Butler), the then MI5 chief Dame Stella Rimington, the head of GCHQ Sir John Adye, an unnamed MI6 officer and other top officials to discuss the interceptions.

Extracts from subsequent letters were read in court by showing that GCHQ consulted experts to work out how the calls might have been intercepted.

But a decision was reached that there would not be a full investigation amid fears that news of any probe would leak out and further fuel public suspicion.

One letter from Sir Clive Whitmore, permanent secretary at the Home Office, to Sir Robin, said: "He (the home secretary) thinks that there is a real danger that even a Security Service inquiry of the kind we have in mind would quickly come to the attention of the media.

"His strong fear is that when that happened, the press would portray the existence of the inquiry as clear proof that - notwithstanding what he and other ministers had been saying about their conviction that members of the security service or of GCHQ had had absolutely no part in the interception of Royal telephone conversations - they believed in fact that such involvement was a real possibility and that they were therefore having it investigated."

Cross-examined by Michael Mansfield QC, Lord Fellowes added: "Far be it for me to interpret the home secretary's thoughts, but such an inquiry might only lead to further harm being done to the reputations of the security services - unjustified harm - and on balance he apparently came to the view therefore that an investigation was the wrong route."

He added: "I suppose the telephone at Sandringham could have been bugged - it's physically possible no doubt.

"But I do not think it is exceedingly likely because I do not think that any other communication from Sandringham were similarly leaked."