Saudi prince denies arms deal claim

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In a statement issued through his lawyers, Prince Bandar bin Sultan said reports that he had received £1 billion in "backhanders" from BAE Systems for the massive Al Yamamah contract were "serious allegations".

The statement insisted money was paid into accounts in the name of the Saudi Arabian Ministry of Defence and Aviation. "Any payments into those accounts made by BAE were pursuant to the Al-Yamamah contracts and as such would not in any way have been "secret" from the parties to those contracts," it said.

"Whilst Prince Bandar was an authorised signatory on the accounts any monies paid out of those accounts were exclusively for purposes approved by MODA."

Earlier, Tony Blair stood by last year's decision to halt a Serious Fraud Office corruption investigation into the 1980s deal, despite demands for a new inquiry following the latest claims.

The Prime Minister insisted his judgment was still that the probe would only have achieved the "complete wreckage" of Britain's "vital strategic relationship" with Saudi Arabia. But while Mr Blair - attending the G8 summit in Germany - strongly defended the decision, Gordon Brown signalled his support for new controls on arms sales.

Speaking on Wednesday night at a Labour leadership hustings in London, the Chancellor, who takes over later this month as Prime Minister, said: "I hope we will be able to do more on arms sales in the next period."

The BBC and The Guardian said more than £1 billion was paid into accounts controlled by the former Saudi ambassador to the US, Prince Bandar bin Sultan, over a period of at least a decade.

The payments were said to have been made by BAE Systems - the UK's biggest arms manufacturer - with the full knowledge of the Ministry of Defence.

However, the statement from Prince Bandar expressed "dismay and shock" at the allegations. It said the accounts in question had been audited by the Saudi Arabian Ministry of Finance, and "no irregularities" were found.