British intelligence knew about a nuclear smuggling network long before it became public knowledge at the start of this year, but did little to intervene, the BBC has been told.
By Allan Urry
BBC current affairs reporter
During Operation Desert Storm in 1991, coalition forces drove Saddam Hussein's military from Kuwait.
AQ Khan dramatically confessed to leaking nuclear secrets in February
Following his defeat in the Gulf War, the United Nations authorised inspections of Iraq's military facilities because of concerns Saddam Hussein was trying to build the bomb.
It was a slow process, but according to one former weapons inspector, eventually documents were recovered from Iraqi intelligence outlining an extraordinary offer to sell nuclear equipment and expertise to Saddam Hussein in the months leading up to the Gulf War - an offer which could have made all the difference.
David Albright, a physicist, says an approach was made from the network run by the Pakistani scientist AQ Khan.
"They had trouble building nuclear weapons and this design, that we now know Khan could have offered Iraq, would have been ideal," Mr Albright said.
In the event, the Iraqis hesitated, fearing dirty tricks by the CIA. Mr Albright says British and American intelligence knew all about the documents and should have done more about Mr Khan.
"When I saw the document I was really stunned by it. This was like a smoking gun document of some really horrific thing taking place and I was surprised by the lack of follow-up. It didn't seem to be taken that seriously".
Creating a successful nuclear weapons programme is highly complex and technically demanding. Until now it has been thought to be beyond the reach of nations trying to do so secretly.
But the Khan network changed all that. It offered off-the-shelf solutions for regimes which until recently were thought incapable of mounting a credible nuclear threat.
In 1997, two years after the warning signs were found in Iraq, Libya approached the same network.
Speaking for the first time about his country's efforts to get the bomb, the son of the Libyan leader Colonel Gaddafi, Seif al-Islam, said Libya felt vulnerable because of all its enemies.
"Don't forget we are a very small country and we had a very severe struggle with the superpowers," he said.
"And we fought the Americans, the British, the French and even our neighbours and we didn't have any allies. Therefore we needed a deterrent to deter our enemies".
Under the noses of the international community, Tripoli smuggled in sensitive equipment supplied by Khan's network.
It was only when Col Gaddafi decided last year to change the course of his country's recent history, and make peace with his enemies, that it stopped.
His son, Seif al-Islam, was authorised to broker one of the most extraordinary deals in modern times.
At a hotel in London's Mayfair district, he met agents from MI6 and offered to give up the pursuit of nuclear weapons in exchange for a new alliance with Britain and her allies.
Pakistan has openly developed nuclear weapons
"I was face-to-face with the British secret service for the first time in my life," he said.
"I know my father very well and I know for a long time that he is ready to tackle this WMD issue with the West, if there is the right deal on the right terms".
Last December, Libya formerly renounced its WMD programme, opening the way for better relations with Britain and the US.
'Good idea' about Libya
But why was Col Gaddafi not confronted sooner over his plans to acquire weapons of mass destruction?
According to David Landsman, Head of Counter-Proliferation at the British Foreign Office, MI6 knew what was going on before Tripoli threw in the towel.
"You can have information, you can have suspicions, but in the end if a country doesn't want to cooperate fully there are limits to what can be found out," he said.
But in Libya's case, you did in fact know quite a lot about what was going on?
"We had some good ideas about a good deal".
But it took them to come to you before the programme was dismantled?
Colonel Gaddafi decided to change Libya's relations with the West
DG: "Well that's a pretty good way of doing it if it works and it was an approach which was well worth pursuing and it's an approach which in the end proved successful.
"Of course I'm not saying that had the Libyans not done that we wouldn't have found other ways to expose what they'd being doing and to help to bring it to a conclusion."
Although Libya has been seen as a diplomatic triumph led by Britain, the failure to stop AQ Khan and his black market nuclear weapons network before now has had serious consequences.
He has armed his own country, Pakistan, and then made a fortune selling equipment and expertise to Iran and North Korea.
Despite Mr Khan confessing to this, Iran still denies having a nuclear weapons programme.
North Korea has withdrawn from the international treaty governing non-proliferation of such weapons.
Unlike Libya, neither country looks likely to willingly give up what they have got.