The Foreign Office warned Sir Tony Blair that scrapping the Horizon plan would damage relations with Japan, The Telegraph can reveal.
The former Prime Minister ordered officials to press ahead with the Post Office's new IT system, despite being told it was "plagued with problems" and that independent IT experts had found the company behind it "did not meet the good industry practice' in dealing with it. of the project.
Documents released by the Cabinet Office show that Sir Tony's decision came after Sir David Wright, the British ambassador to Japan, warned that scrapping the deal would lead to the collapse of the Japanese firm that built the system and " would have profound consequences... for bilateral ties" with Tokyo.
Sir Geoff Mulgan, Sir Tony's number 10 adviser and now professor of public policy at University College London, told The Telegraph that the reluctance to strain relations with Japan had "a major influence" on decision-making on Horizon.
The revelation raises new questions about the then prime minister's decision to press ahead with the troubled plan, which Labor inherited from the Conservatives after coming to power in 1997.
Bugs in the system caused problems for thousands of sub-postmasters for more than a decade and led to the biggest miscarriage of justice in British history.
A spokesman for Sir Tony said Britain's relationship with Japan was "one of many factors" he took into account when deciding to proceed with Horizon, but that his "primary concern was the technical capabilities of the system". .
Government documents show that ministers and officials in the Labor government were concerned in 1998 that Horizon was significantly behind schedule and, according to an official note from Sir Geoff, "plagued by problems".
A Ministry of Finance document submitted to the then Prime Minister on 22 April 1999, entitled "ICL Pathway: list of failures", stated that "independent evaluations of the Horizon project by external IT experts have all (most recently this week) have concluded that ICL Pathway [the subsidiary building the system] have failed and are failing to comply with good industry practice in moving this project forward, both in their software development work and in their management of the process."
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Every version of the software released so far has been subject to "bugs and issues," the document said.
But Sir Tony made it clear that the project should not be scrapped, with Jeremy Heywood, his chief private secretary, telling ministers the following month that the Prime Minister wanted to avoid "putting the whole future of ICL at risk". The government decided to continue with a more austere version of the project.
It can now be revealed that the decision followed an intervention by Sir David in which Sir Tony was warned that scrapping the deal with Fujitsu-owned ICL would "lead to major internal problems within Fujitsu and the collapse of ICL."
The warning came in an urgent message written in December 1998, which read at the top: "CABINET OFFICE PLEASE PASS TO PS/NO 10" - a reference to Sir Tony's private secretary in Downing Street.
Sir David warned that "we have a major and potentially damaging problem." He described a meeting in which Michio Naruto, the vice president and chairman of Fujitsu's ICL, expressed concerns about the risk of the government pulling out of the plan.
He said that Naruto "repeatedly stressed that the failure of the project will have serious consequences for Fujitsu's international status, lead to major internal difficulties within Fujitsu and the collapse of ICL," adding: "Any threat to the continuation of ICL's viability would have profound implications for employment in Britain and for bilateral ties.
"The waves created would be damaging to politics at home and to Britain's position of power here compared to our European competitors. This is already weakened by the perception of a move away from the center of Europe towards the single currency. We can do it without any more problems."
Sir Geoff said it is difficult to overstate "how important Japanese foreign investment was in the 1980s, and in the 1990s it almost saved British manufacturing. So the stakes were quite high, and that was certainly an important factor."
He added: "My recommendation was, despite that, I still thought [Horizon] should have been canceled and started over. I think Alistair Darling took a similar position.'
According to testimony from a former senior Trade Department official, Downing Street made it clear to ministers and officials in early 1999 that Sir Tony was "not looking for an outcome that involved walking away from Horizon or ICL".
A spokesman for Sir Tony said: "As is absolutely clear from the published correspondence within the Government, Tony Blair as Prime Minister took very seriously the issues surrounding the Horizon contract, which was behind schedule by the time he took office but was considered essential for savings in the benefit system.
"After Mulgan's warning ... Mr Blair wrote on that note: 'I would prefer option 1 [pressing ahead] but because of Geoff's statement that the system itself is flawed. There must be a clear view of it.
"Speak to me about that: if you read the attached document, it's all about the financial deal. But there the risks are quite similar, probably as a result of continuing. The real core of it is the system itself. "
The spokesperson pointed to a note from Mr Heywood which said the Prime Minister's "sole concern was to agree a viable system that would actually deliver what the Government wanted"
"An independent panel of experts was asked to provide a technical assessment of the viability of the project, and they concluded that it was viable," the spokesperson added.
"That is why the issues were taken seriously and investigated at every stage... The implicit idea that Tony Blair received warnings and ignored them is categorically wrong.
"It is now clear that the Horizon product was seriously flawed, leading to tragic and completely unacceptable consequences, and Mr Blair deeply sympathizes with all those affected."