Messages were ferried between Ken Bigley's kidnappers and the British government via an intermediary in the days before his killing.
The group holding Ken Bigley never changed their demands
It is thought to be the first time direct contact has been made with the Tawhid and Jihad group, led by Jordanian militant Abu-Musab al-Zarqawi.
Following Mr Bigley's murder the government confirmed Tony Blair had sent messages to the captors in Iraq.
Contact was established after a man approached the British Embassy in Baghdad on Monday, claiming he was authorised to speak for the group.
But his identity will never be revealed by British diplomats, according to a report in the Times on Saturday.
The plan - which the man claimed was a genuine attempt to resolve the crisis peacefully - did not succeed and on Thursday Ken Bigley, 62, was beheaded by his captors.
On Friday Foreign Secretary Jack Straw confirmed the intermediary had been the one to provide "proof beyond reasonable doubt" that those holding Mr Bigley had carried out their threat.
While the mediator carried messages between the extremist group and the British government, another avenue was being explored, according to reports.
The Times said attempts were being made to draw up a different deal by international diplomats, religious clerics, tribal chiefs, Iraqi medics and the son of Libyan leader Colonel Gadaffi, Saif.
The newspaper quoted a British diplomatic source saying "an unprecedented effort" was put into trying to free Mr Bigley.
But they would never know whether the Liverpudlian's kidnappers ever seriously considered letting him go, he was quoted as saying.
By the time the intermediary approached British diplomats in Iraq, the prime minister had made clear he would listen to any approach by the captors, whilst maintaining he would not negotiate with terrorists.
But when it became apparent the group was still demanding the release of Iraqi women prisoners, hopes began to fade, said the Times.
Diplomats explained the British had no women in custody, and produced a Red Cross document as proof, said the report.
Family kept informed
On Thursday Iraq's Prime Minister Iyad Allawi had suggested progress was being made in the case, telling the BBC some developments were "quite good" and that the situation was "dynamic".
Speaking after the killing Mr Straw said he and the prime minister had approved the messages going between the government and the militants.
They were in line with the government's public pronouncements, he said.
Rejecting suggestions that more could
have been done to save Mr Bigley, Mr Straw said: "We did everything we possibly could."
Abu Musab al-Zarqawi is notorious for his ruthlessness
Saying he could only give "a limited outline" of the efforts to free the engineer, Mr Straw confirmed the approach by a man "presenting himself as a potential intermediary with the captors".
"It was very clearly in Mr Bigley's interest that we should do all we could to establish contact.
"Messages were exchanged with the hostage-takers in an attempt to dissuade them from carrying out their threat to kill Mr Bigley," he said.
"But at no stage did they abandon their demands relating to the release of
women prisoners, even though they were aware that there are no women prisoners
in our custody in Iraq.
"Ken Bigley's family in Liverpool and his wife in Thailand were kept fully
aware of our communications with this intermediary," he added.
The foreign secretary's Iraqi counterpart, Hoshiyar Zebari, stressed there had been no
"negotiation" with the kidnappers.
Mr Zebari later said he doubted suggestions that the intermediary would be able to help track
down the killers.
"These intermediaries or middle men do not necessarily belong to the groups
who are holding the hostages," he told BBC Radio 4's Today programme.