A confidential exchange of letters, released after 30 years of government secrecy, between former prime minister Margaret Thatcher and David Owen, then the leader of the the Social Democratic party (SDP), has shed new light on an enduring MI5 spy scandal. The real-life espionage drama, which began in 1983 with a mysterious Moscow death and was followed by the arrest in Britain of a would-be MI5 mole, led to a full-scale internal investigation into the security service and fuelled an escalating diplomatic feud with the Kremlin. The fallout, it is now made clear in papers released this weekend by the National Archives, added to worsening relations with the Soviet bloc, which pulled out of the 1984 Olympics later that summer in Los Angeles. It also led to the British expulsion of a top Soviet diplomat, Arkady Guk, who was already known by the UK government to be running foreign agents in London. Lord Owen, 85, Labour foreign secretary from 1977-79 under James Callaghan, was publicly and privately scolded by Thatcher for revealing the identity of the new head of MI5, who had been brought in from outside the intelligence services to shake up procedures and improve accountability after a string of high-profile embarrassments. Not only was this job secret, so was the existence of MI5 itself at the time. Owen, who co-founded the SDP, was speaking in the House of Commons on 9 May 1985, just after Thatcher presented the critical findings of a security commission report into the handling of errant MI5 officer Michael Bettaney, who had been imprisoned for handing sensitive documents over to the Soviet Union. The then leader of the opposition, Neil Kinnock, responded to the prime minister first, with a scathing criticism of poor management inside the security service. Then, against longstanding convention, Owen took to his feet in the chamber and named Sir Antony Duff, newly installed at the top of MI5, arguing that his appointment alone would not be enough to reassure the public about the security services. Owen, then the MP for Plymouth Devonport, said the “professional and operational efficiency of the secret services surely must come into question”, adding: “Although Sir Antony Duff is a very distinguished public servant, will the prime minister give careful consideration to the proposal for a complaints ombudsman covering both the security and intelligence services?” The prime minister immediately called out Owen for this apparent slip, saying: “We should continue to enable the secret services to run in a secret way. After all, those against whom they operate always have the benefit of secrecy.” But we now know she went on to tell him off in a “strictly confidential” letter: “I was surprised and disappointed,” she wrote, adding that she feared such behaviour “encourages others to ignore the rules”. He apologised: “I was obviously in error and hope you will convey to Tony Duff my regrets.” Further papers show the extent of the diplomatic and political ripples that followed the arrest of Bettaney, who served 23 years for his crime and died of alcoholic poisoning five years ago. He was recruited to the anti-terrorist division, but developed a drinking problem, and the report found his MI5 bosses at fault. Freshly published documents also show that leading civil servants and government officials were soon attempting to stop the press making links between him and the earlier mysterious death in Moscow of a British banker, Dennis Skinner. Just before he was killed in a fall from his 12th-floor flat, Skinner had indicated that there was a Soviet mole inside MI5. In the run-up to the 1984 inquest into the death, his distraught widow had claimed that the double agent her husband had uncovered was Bettaney. Many of the supporting documents, believed likely to tackle the need for reform and oversight of the security service, have still been held back from release, even 30 years on, for reasons of national interest under the Public Records Act. Richard Norton-Taylor, an expert investigative journalist in the field, vented his frustration on Saturday about the number of documents still unavailable to the public. Speaking to the Observer this weekend, he said the Bettaney case was a significant incident. “The former head of MI5 was pushed out partly as a result, and the mishandling of the Bettaney case, among others, was to go on to affect others, including the MI5 officer Cathy Massiter, who revealed the secret surveillance of British trade unions.”