A foreign criminal awaiting trial on terrorism charges had been jailed in the UK previously but was not deported on his release, it has emerged.
Charles Clarke is likely to face more pressure from opposition parties
The man, who cannot be named for legal reasons, served a prison term for robbery and was released in 1998.
There are no records to show if his case was considered for deportation, but it is likely to put more pressure on Home Secretary Charles Clarke.
The Conservatives said the case, if true, was "an unforgivable failure".
Some 1,023 foreign prisoners were released over seven years without being considered for deportation, causing opposition parties to call for Mr Clarke's resignation.
The home secretary admitted to MPs on Wednesday that 90 of the freed prisoners were serious offenders - including rapists and killers.
Police were still searching for 38 of the more serious criminals, he said.
The terror suspect, who the Home Office says is not one of the 1,023 freed prisoners, arrived in Britain in the early 1990s as an asylum seeker and was given exceptional leave to remain.
The story first emerged in a blog by Political Editor Martin Bright in the New Statesman, which revealed the suspect was convicted in 1996 of taking part in a robbery and was freed two years later.
The Home Office said it did not start to keep detailed records of deportation cases until February 1999, so it was not clear whether or not he was recommended for deportation.
A spokesman for the department said it was unlikely a recommendation would have been made as he was under 18 at the time of sentencing.
Shadow Home Secretary David Davis said, if the case was true, "this is as bad as it could be".
"It would amount to an unforgiveable failure to protect the public against the most serious threat to their safety."
Nick Clegg, for the Liberal Democrats, said it would be the "gravest possible development".