Britain's reputation for fighting corruption has suffered "severe damage" as a result of dropping the Serious Fraud Office inquiry into a £40 billion arms deal with Saudi Arabia, MPs warned.
The Commons Foreign Affairs Committee said the decision to abandon the long-running SFO investigation into the 1980s al Yamamah deal may also have undermined Britain's ability to tackle the Saudis over human rights violations.
"We conclude that the Government's decision to halt the inquiry into the al Yamamah arms deal may have caused severe damage to the reputation of the United Kingdom in the fight against corruption," the committee said.
"We recommend that in its response to this report, the Government set out what steps it has taken since that decision to maintain momentum on international anti-corruption measures."
It added: "There may also be an argument that it has weakened the United Kingdom's ability to take firm action against Saudi Arabia in a range of fields, including human rights."
The Government has already faced criticism from the international Organisation for Economic Co-operation and Development which voiced "serious concerns" that the move was inconsistent with its anti-bribery convention.
The inquiry - which was examining relations between the Saudis and Britain's biggest arms manufacturer, BAE Systems - was halted last December after consultations between the Prime Minister and the Attorney General, Lord Goldsmith.
It followed reports that the Saudis were threatening to back out of a £10 billion deal to buy Eurofighter jets from BAE if the investigation continued.
In its report, the committee also expressed concerns about human rights abuses in Iraq and Afghanistan.
"There has been a further grave deterioration in respect for human rights in Iraq, in large part caused by the worsening security situation," it said.
