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Britain could face a corruption inquiry following the decision to halt the Serious Fraud Office investigation into a multi-billion pound Saudi arms deal, the world's leading economic body warned last night.

The Organisation for Economic Co-operation and Development signalled that it would mount an investigation as a defiant Tony Blair took "full responsibility" for the decision.

Lord Goldsmith, the Attorney-General, announced on Thursday that the Serious Fraud Office was "discontinuing" its two-year probe into the Al Yamamah arms contract with BAE systems, a deal worth up to £150 billion. The SFO investigation was launched following allegations that middlemen had been paid millions of pounds from secret slush funds.

But the Saudis threatened to cancel a £10 billion order for Typhoon fighters unless it was halted, threatening thousands of defence industry jobs.
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Last night Professor Mark Pieth, the chairman of the OECD's working group on bribery, said that he was very concerned about the decision to halt the probe into an alleged BAE slush fund.

"We need to ask the UK some questions. But I have to say, comments by Lord Goldsmith have not helped allay my concerns," he said. Prof Pieth said he had been contacted by several members of the working group who had been alarmed at Britain's move.

He said the group would discuss the issue next month at a two-day meeting with officials from the Home Office, Foreign Office and Ministry of Defence police.

Britain is a signatory to the 1999 OECD Anti-Bribery Convention, which stresses that investigations should not be "influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved."

While Lord Goldsmith admitted yesterday that he was "uncomfortable" about claims by Labour MPs and opposition parties that he had bowed to Saudi pressure, Mr Blair delivered a robust defence of the decision.

The Prime Minister said that he took "full responsibility" for advising Lord Goldsmith that it was not in Britain's national interest for the inquiry to continue.

Speaking at a press conference at the European Union summit in Brussels, he said he had given advice to Lord Goldsmith in his role as Prime Minister.

"I have absolutely no doubt the right decision was taken. I take full responsibility for the advice that I gave in respect of it," he told reporters.

While Downing Street insisted that Lord Goldsmith did not believe a successful prosecution could be brought, Mr Blair made clear that the importance of keeping the Saudis on side was a major consideration.

In a defiant performance Mr Blair – who flew on later to Turkey before embarking on a tour of the Middle East – added: "Leave aside the effects on thousands of British jobs and billions worth of pounds for British industry.

"Leave that to one side – our relationship with Saudi Arabia is vitally important for our country in terms of counter-terrorism, in terms of the broader Middle East, in terms of helping in respect of Israel-Palestine.

"That strategic interest comes first, particularly in circumstances where if prosecutions had gone forward, all that would have happened is that we would have had months, potentially years, of ill feeling between us and a key partner and ally, and probably for no purpose."

The Prime Minister's spokesman later insisted that the "principal reason" for pulling the plug on the SFO's investigation was the Attorney-General's decision that a successful prosecution was unlikely. The spokesman also denied that the announcement had been made on Thursday in an attempt to bury bad news. He said that the decision had been made public at the earliest opportunity after the stock exchange had closed for business because it could affect BAE's share price.

But he insisted that Mr Blair did not regret his decision.

"He isn't going to apologise for what he believes is the right decision in the national interest of the country," he said.

However, Lord Goldsmith said yesterday that he felt uneasy about allegations that his decision was the result of pressure from the Saudis. "I am uncomfortable about that, but you have to deal with the reality of the situation," he said, before reiterating that in his view there would not have been a successful prosecution.

"There were some very big problems with this and my judgment was it wouldn't succeed," he added.

However, his decision faced furious condemnation last night from Labour MPs and opposition politicians.

Sir Menzies Campbell, the Liberal Democrat leader, said it was a "sorry day for Britain's reputation" and added: "It appears in this case that adherence to the rule of law has been subordinated to other considerations."

Eric Illsley, the Labour MP and a senior member of the Commons foreign affairs select committee, also voiced dismay and said he suspected that ministers had been "leaned on very heavily" by the Saudis.

"We appear to be giving businessmen carte blanche to do business with Saudi Arabia which may involve illegal payments or illegal inducements," he told BBC Radio 4's PM programme.

Lord Clinton-Davis, a former Labour trade minister, voiced disappointment and said that he had hoped the Government would have been a "little more moral".

"I know we have a problem about jobs but are we to ensure that is paramount in our considerations? I don't think so," he said.

Earlier, a pressure group which last year won a legal challenge against the government over corruption laws, said it might challenge Thursday's decision in court. The Corner House said it had hired the law firm Leigh, Day to look at the possibility of seeking a judicial review.