The documents, only made public this week after an intervention from the Information Commissioner, include an undated letter marked "secret" warning Ms Thatcher that there was "the risk that such an award could give rise to adverse criticism".

Smith, who died in 2010, served as the Liberal and later Liberal Democrat MP for Rochdale between 1972 and 1992. He was accused of abusing eight boys in the late 1960s and, though he was not prosecuted at the time, police say procedural changes mean he would be today.

The Cabinet Office last night denied a "cover-up" after releasing the 19-page file following repeated demands from the Mail on Sunday, and said the case was "sensitive and complex".