MI5 received intelligence four months before 7/7 which could have identified ringleader Mohammed Sidique Khan as an extremist, the inquests have heard.MI5's chief of staff, known as Witness G, said the security service had received a report about an extremist called "Saddique" in March 2005.
The information was not followed up for good operational reasons, he argued.
Counsel to the families of the 52 people killed in the 2005 London attacks are questioning Witness G.
Four suicide bombers detonated their devices on three Tube trains and a double-decker bus on 7 July 2005.
Many of the relatives of those who died want to know why those under surveillance were not subjected to detailed scrutiny.
On Monday MI5's chief of staff told the 7 July inquests the security service could not be held responsible for the attacks.
Giving evidence anonymously, on Tuesday Witness G said that MI5 knew of many individuals involved in Islamist extremism but that was not the same as planning terrorist attacks.
In particular, they knew that many of these people took apart in "Jihadi tourism" during which they would go to Pakistan to have a look around.
'Greater chance' But Witness G told the inquests if the information had been pursued, he had a high degree of confidence MI5 would have identified the extremist as Mohammed Sidique Khan.
When it was put to Witness G that if the intelligence had been looked into, then Khan's plans might have come to light before the attacks, the senior spy replied: "Yes, I think that's fair."
End Quote Witness G MI5 chief of staffBeing an interesting target does not necessarily mean that he would have a high proportion of surveillance resources thrown at him”
However Witness G said that the decision had been taken not to further investigate the real identity of "Saddique" for good operation reasons - but he insisted that it was impossible for him to explain the decision because of national security reasons.Witness G has already told the inquest that the security service rarely recorded decisions to stop investigating people but in this particular instance there was a record of why they had not delved further into "Saddique's" background.
Hugo Keith QC, counsel to the inquests, said: "If he had been identified as [Mohammad Sidique Khan] and came under intrusive surveillance, whatever he was plotting by then might have come to light?"
Witness G said there would have been "a greater chance" but "a high degree of surveillance would have been necessary to come anywhere near discovering the plot".
Witness G said: "Had we identified him on the basis of this information it would have made him an interesting target. But being an interesting target does not necessarily mean that he would have a high proportion of surveillance resources thrown at him."
However Hugo Keith pressed Witness G further, suggesting that had they identified the man as Mohammad Sidique Khan, they would have been able to also see the links between him and the 2004 fertiliser bomb plot, and to a known al-Qaeda facilitator living in Luton.
But Witness G said the greatest chance to have identified Mohammad Sidique Khan would possibly have been intelligence that a man known as "Ibrahim" had attended a terrorist training camp in Pakistan. That man was only identified as Sidique Khan after the bombings.
'Prioritise ruthlessly' The inquests have already heard that the ringleader Mohammad Sidique Khan appeared on the periphery of another investigation, codenamed Crevice, in 2004 - but the security service concluded at the time he was not a threat to the UK.
It also heard how MI5 missed an opportunity to identify Khan when they failed to show Mohammed Junaid Babar, their key informant, a photograph of the 7 July bomber.
Khan and suicide bomber Shehzad Tanweer, were photographed by a surveillance team in front of a Burger King outlet at the Toddington Services on the M1 in Bedfordshire on 2 February 2004.
But instead of using this sharp colour picture, MI5 provided only a very badly cropped image of Tanweer to US investigators interrogating the supergrass.
A photograph of Khan was also edited but it was never shown to Babar - apparently because the quality was so poor.
MI5 chiefs have previously told the Intelligence and Security Committee that in late 2004, their officers had an enormous workload because of massive growth in al-Qaeda-linked plots.
On Monday Witness G said this workload, www.dominicanflash.com meant the service was forced to "prioritise ruthlessly", and could only pin down the "crocodiles nearest the boat" rather than follow up every individual potential lead.
Last month, the coroner Lady Justice Hallett granted a request from Home Secretary Theresa May for Witness G to give evidence anonymously.
But she refused to rule that the witness should be screened from the families of those who died.
The attacks were carried out by suicide bombers Mohammad Sidique Khan, 30, Shehzad Tanweer, 22, Hasib Hussain, 18, and Germaine Lindsay, 19.
They targeted Tube trains at Aldgate, Edgware Road and Russell Square and a bus in Tavistock Square.