She spoke out after a majority of law lords elected to allow an appeal against an earlier decision that he enjoyed immunity from prosecution.

Home Secretary Jack Straw must first approve the decision and decide which court should now rule on the extradition request.

Straw: Case in his hands now

Lady Thatcher urged him to show "compassion" by over-ruling the Lords.

She said: "Today's judgement by the Law Lords places the decision about what happens to Senator Pinochet back into the hands of the British Government.

"The senator is old, frail and sick, and on compassionate grounds alone should be allowed to return to Chile.

"I also remain convinced that the national interests of both Chile and Britain would be best served by releasing him, which the home secretary has it in his power to do."

Shadow Home Secretary Sir Norman Fowler responded to the unexpected announcement by called for a statement from Mr Straw.

We want a statement, says Norman Fowler

He said there was much concern about Britain's relations with the "democratically-elected" Chilean Government.

Pointing to the potential impact on Britain's relations with Spain as well, he said: "Wouldn't it be right for us to be able to question the home secretary on the use of what everyone agrees is very wide discretion.

"There are many people in this country and Chile who feel this affair has gone on for long enough and that the way forward is for the home secretary to use his discretion and bring these proceedings to an end."

But his and Lady Thatcher's remarks clashed completely with those of some Labour MPs.

'Jobs at risk'

Tony Benn commended the Law Lords in reaching their unusual decision, which goes against a previous ruling by the High Court which said General Pinochet enjoyed immunity from prosecution.

Pinochet: Faces long stay in the UK

"You can't on the one hand say we are pursuing Saddam Hussein for war crimes and then say Pinochet is exempt," Mr Benn said.

But Lady Thatcher was backed by Tory MP Theresa Gorman, who warned jobs and contracts were at risk.

Mrs Gorman said: "The home secretary should show some guts and not kow-tow to his left-wingers. Pinochet should be allowed to go back to Chile.

"There are huge financial implications involved in this. Chile is a good friend of Britain and jobs and contracts could be put in jeopardy."

She said the UK should have "nothing to do" with the decision: "It is not our problem. Pinochet comes from a country which has a set of laws and they must deal with it in a democratic way."

'Justice for murderer'

Labour MP Jeremy Corbyn, who has campaigned vigorously against Pinochet, hailed the judgement as "a great day for justice".

A protest for those who died during General Pinochet's regime

He said: "It's a wonderful day and those people who have campaigned for 25 years and more for justice for people around the world since the coup in 1973, it has been a vindication of their efforts.

"Over the past six weeks there's been an attempt to rewrite history. Chilean fascists have arrived in large numbers and tried to claim that Pinochet brought stability and democracy to Chile. The reality is thousands of people disappeared, thousands died and even more were forced into exile."

Mr Corbyn said: "I'm very certain that there's going to be the most enormous pressure on the home secretary to ensure the legal process goes ahead."

Another Labour MP, David Winnick, wanted a chance for the House to debate the ruling.

"It is very good indeed that a notorious mass murderer and torturer can be brought to justice," he said.

And Labour's Brian Sedgmore said: "I hope that Mr Pinochet gets his just desserts and that the magistrate allows the extradition to go ahead, and Jack Straw lets it go ahead.

"It could be embarrassing to him, but I'm sure it will do the right thing."

Pauline Green, leader of the Socialist group in the European Parliament, said: "At long last it seems that this evil man is to be brought to justice.