The government wants to postpone the investigation to help its favoured candidate Iyad Allawi, the former prime minister, in the election on 15 December. The money disappeared during his administration.

The UK's enthusiasm for Mr Allawi may have led it into promoting a cover-up of how the money was siphoned off and sent abroad. One Iraqi minister believes the investigation will be dropped when the next government is formed.

The scandal is expected to explode with renewed force in the next few weeks. The Independent has learnt of secret tape recordings of a wide-ranging conversation between a Ministry of Defence official and a businessman, naming politicians and officials involved.

"It is possibly one of the largest thefts in history," Ali Allawi, Iraq's Finance Minister, said. "Huge amounts of money have disappeared. In return we got nothing but scraps of metal." Most of the military purchases were made in Poland and Pakistan. They included obsolete helicopters, armoured vehicles unable to stop a bullet and grossly over-priced machine guns and bullets. Payments were made in advance. Often the Ministry of Defence did not even have a copy of contracts under which it was paying hundreds of millions of dollars.

Ahmed Chalabi, the Deputy Prime Minister, says William Patey, the British ambassador in Baghdad, asked him not to give prominence to the scandal before the election because this might "politicise the investigation". Mr Patey denies he had asked for the investigation to be delayed.

A former senior British adviser was quoted as saying that Tony Blair was convinced Mr Allawi "is the best hope" for Iraq. He added that Mr Blair had sent a small team of operatives to give political help to Mr Allawi. In background briefings, British officials have heavily supported the former prime minister despite evidence that government corruption was rife under his administration.

Mr Allawi is a former member of the Baath party who fell out with Saddam Hussein in the 1970s. Resident in Britain for many years, he became the leader of an opposition group, the Iraqi National Accord. He has never denied a close association with British intelligence and the CIA said he was justified in taking support from any foreign intelligence service willing to help him fight Saddam.

Supporters of Mr Allawi have denounced allegations about widespread fraud while he was prime minister in 2004-05 as an attempt to damage him before a close-fought election next week. But documents seen by The Independent show Mr Allawi's office authorising astonishingly large sums of money to be spent by the Defence Ministry. The cabinet was excluded at the request of Hazem al-Shaalan, the Defence Minister.

He asked for and received permission from the prime minister's office to spend money without oversight in September 2004, citing the gravity of the crisis facing the Iraq. In November, Mr Shaalan received a letter from the cabinet secretariat saying the prime minister had agreed to spend $1.7bn "for the purpose of creating two rapid intervention divisions". By the winter of 2004, large sums were being sent out of Iraq in sacks filled with $100 bills loaded on to planes. One shipment of $300m was noticed and intercepted.

The Iraqi army and police have paid heavily in lives because of the misappropriation of the almost all the defence procurement budget. Insurgents are often better armed than government forces. Soldiers travel through Baghdad in ageing white pick-ups normally used to carry cabbages to the market.

The men chosen, primarily by the US, to run the Iraqi Defence Ministry were extraordinarily inexperienced. They included Mr Shalaan, the Defence Minister, who had worked in real estate in a small way in London during the 1990s. He may have appealed to American and British advisers because he was vociferously anti-Iranian.

Ziyad Cattan was the head of military procurement at the Defence Ministry who signed cheques for hundreds of millions of dollars. He openly admits to knowing nothing about weapons. He returned to Iraq just before the war in 2003 after 27 years in Poland. His previous jobs included selling flowers, shoes and used cars. At one time he ran a pizza parlour.

Mr Cattan is allegedly one of the voices secretly recorded when he was talking in a car with Naer Mohammed Ahmed Jumaili. Mr Jumaili acted as middle man for the arms deals, Mr Chalabi said at a press conference in Baghdad this week. He said 35 cheques from the Ministry of Defence worth $1.1bn were paid into Mr Jumaili's account at the Al Warkah Bank in Baghdad.

A mystery surrounding the alleged misappropriation of military procurement budget is that it passed unnoticed by American and British officials in Baghdad. This was despite the fact that they were supposedly supervising the build up of a new Iraqi army and police force. Mr Shaalan and Mr Cattan both protest that nothing was done in the Iraqi Ministry of Defence at this time that was not known to the US.

A problem facing the investigation into the missing money is that so many politicians and officials from the Sunni, Shia and Kurdish communities in Iraq were either implicated or failed to notice what was happening. The National Assembly has not lifted Mr Shaalan's parliamentary immunity.

Supporters of Mr Allawi, the Kurdish parties and some members of Shia religious parties have sought to delay the investigation.

Britain has backed Mr Allawi strongly in the hope that as a secular Shia with nationalists credentials he can unite people from the three main communities.

Despite British support, Iraqi political observers do not believe Mr Allawi will be the next prime minister. Last weekend he was chased from the shrine in the holy Shia city of Najaf by worshippers hurling shoes whom he says were trying to kill him.

With most Iraqis voting on sectarian or ethnic lines Mr Allawi will be doing well if he can win more than 25 seats in the 275-member Assembly.