Britain's security status was downgraded less than a month before the London bombings because the security services were confident that there was no-one in Britain capable of carrying out a terror attack, it emerged today.

Details have been published of the threat-assessment memo, which was circulated in June, three weeks before the tube and bus bombings that claimed 56 lives.

The memo, which will be highly embarrassing to the Government, said that there was no imminent threat of attack. "At present there is not a group with both the current intent and the capability to attack the UK," it said, according to a leaked copy obtained by The New York Times.

In a further embarrassment, the assessment also clearly states that the Iraq war had made Britain more vulnerable to terrorists - something the Government angrily denies.

The pronouncement from the Joint Terrorism Analysis Centre (JTAC), which comprises 100 of the most senior MI5, military and Scotland Yard counter-terror specialists, prompted the Government to lower its threat assessment one level, from "severe general" to "substantial".

"Substantial" is the fourth most serious threat level on a scale of one to seven, rating the likelihood of Islamic terrorism only one level higher than the "moderate" threat from the IRA. This compares with "critical," the highest level of alert, which means that an attack is expected within two weeks, down to "negligible," the seventh and lowest level.

The JTAC report was presented to the Joint Intelligence Committee (JIC) last month, and circulated to Scotland Yard, hospitals, Government departments, foreign Governments and multinational corporations.

The bald fact that the threat level had been reduced was widely reported after the bombings, and Charles Clarke, the Home Secretary, has already been forced to acknowledge that the decision was wrong.

But details of the memo had not been seen until it was leaked to The New York Times, which published excerpts today - the first time that the background to the decision has been disclosed. The leak is expected to add to mounting pressure for an inquiry into Britain's handling of security intelligence. Today, Government officials attempted to minimise the fallout by claiming that the decision had no practical impact on counter-terrorism measures.

The report concludes that there was no sign of an imminent attack, although it does say that a general threat existed from both the international al-Qaeda network and from homegrown radicals acting independently.

The threat from al Qaeda's "leadership-directed plots has not gone away," it said. Despite that threat and the situation in Iraq, it added, "many of our current concerns focus on the wide range and large number of extremist networks and individuals in the UK and individuals and groups that are inspired by but only loosely affiliated to AQ (al-Qaeda) or are entirely autonomous.

"Some of these have the potential to plan UK attacks, and it is also possible that lone extremists or small groups could attempt lower-level attacks."

JTAC comprises around 100 intelligence officers dedicated to analysing the activities and threat from al-Qaeda related terrorists in Britain. It passes its findings onto the JIC, which advises the Government on its security strategy. The report continues: "Events in Iraq are continuing to act as motivation and a focus of a range of terrorist related activity in the UK."

Yesterday John Reid, the Defence Secretary, and Jack Straw, the Foreign Secretary, both rejected a report from Chatham House, the respected independent research group, which said that the Iraq war had made Britain more vulnerable.

Tony Blair has argued that the terrorists are driven solely by their "evil ideology", rather than by political concerns. At a press conference in Downing Street today after a meeting with Muslim leaders, the Prime Minister said that terrorists would use any excuse for violence - and foreign policy should not be tailored around those excuses.

"Of course these terrorists will use Iraq as an excuse. They will use Afghanistan. September 11, of course, happened before both those things and then the excuse was American policy on Israel," he said. "They will always have their reasons for acting but we have got to be careful of almost giving in to the perverted and twisted logic with which they argue."

But Professor Sir Bernard Crick, who wrote part of the Home Office handbook given out to new immigrants, today criticised politicians for trying to claim that the terrorist attacks on London were unrelated to the situation in Iraq. He told the Today programme: "I think it is nonsense that the Government denies that there is a political as well as a perverted religious dimension.

"It is so glaring, to so many intelligent, educated young Muslims, that we have fallen in behind a grossly mistaken American foreign policy and are not even protesting against it. Even if we can’t change it, protests from people in authority will cool the water of tolerance in some sections of the community."

Meanwhile an Egyptian newspaper reported today that Scotland Yard had accepted Cairo's assurances that an Egyptian biochemist whose flat is thought to have been used by the London bombers had no connection with the atttacks.

Magdy el-Nashar, 33, is thought to have lent his flat in Leeds to one of the four bombers when he returned to Egypt a week before the July 7 bombings.

He was arrested at his parents' home in Cairo last week after West Yorkshire police found traces of explosives at the flat. Detectives flew from London to join the interrogation.

"There is complete security cooperation with the British side, which is convinced from the questioning carried out by Egypt that el-Nashar had no role in these explosions," al-Ahram newspaper quoted a senior security source as saying. But it said that the chemist would remain in detention until his questioning was complete.

Scotland Yard declined to comment on the report.

Mr el-Nashar told his questioners in Cairo that he returned to Egypt for a six-week holiday and had intended to return to Leeds, where he earned his doctorate earlier this year in enzyme biochemistry.

 In Pakistan, police said today that they were holding seven Islamic militants with possible links to the London bombers.

Authorities also said they had detained another 52 people suspected of links to militants as part of a nationwide sweep.

Security officials believe one of the bombers spent time at a seminary in Lahore, an eastern city where many militant groups have clandestine operations.

The Lahore police chief, Tariq Saleem, said that some people had been taken into custody in the case. "We are holding a few militants who are suspected of having links to the London suicide bombers," he said.

Other police officials said that the seven detained men were from two outlawed militant groups, Lashkar-e-Jhangvi and Jaish-e-Mohammed. Both are linked to al-Qaeda, and some of their supporters have been arrested for trying to assassinate President Pervez Musharraf.

Gordon Brown, the Chancellor, was today announcing an additional £20 million to step up the fight against terrorism and support victims of the July 7 bomb attacks in London.

He was expected to say that the Treasury will provide up to £10 million for the Criminal Injuries Compensation Scheme to cover loss of earnings and other unforeseen costs for victims and their families, and a further £10 million to help the Metropolitan Police in its anti-terrorist operations.

The Government is also understood to be giving £1 million to the Relief Charitable Fund set up by Ken Livingstone, the London Mayor, and the Red Cross.

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