The government has pulled an amendment to its proposed Hillsborough Law amid concerns from campaigners and some MPs that intelligence agencies could use it to "hide serious failures" from the public.
It has also withdrawn the legislation from Monday's parliamentary agenda entirely after initially planning for its report stage and third reading to go ahead and then bring forward amendments in the House of Lords.
Sky News' deputy political editor Sam Coates said one figure close to the talks described the situation as "absolutely mental".
The law, officially called the Public Office (Accountability) Bill, is designed to make sure authorities face criminal sanctions if they attempt to cover up the facts behind disasters such as the 1989 Hillsborough tragedy, the Grenfell Tower fire and infected blood scandal.
One of the amendments suggested by the government this week meant that spies would be within the scope of the legislation. However, they would only be forced to tell the truth if the head of their service approved it.
Campaign group Hillsborough Law Now argued that it could allow intelligence services to "hide serious failures behind a vague claim of national security".
Now, the government has decided not to push ahead with the amendment, but to work with campaigners and bereaved families to bring forward amendments when the bill reaches the Lords.
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"This legislation will right the wrongs of the past, changing the balance of power to ensure the state can never hide from the people it should serve and putting a legal duty on officials to respond openly and honestly when things go wrong," said a government spokesperson.
"The bill will make the police, intelligence agencies and the whole of government more scrutinised than they have ever been, but we can never compromise on national security.
"We will continue to work with all parties to make sure the bill is the strongest it can possibly be, without compromising national security."
Hillsborough Law Now welcomed the move, posting on X: "We welcome the government listening to the campaign, families, MPs and supporters by withdrawing their security services amendment.
"We shall engage further with government to ensure the bill fully applies to the security services whilst not jeopardising national security."
Before the amendment was withdrawn, Liverpool City Region mayor Steve Rotheram and Greater Manchester mayor Andy Burnham said it risked "undermining the spirit of the legislation" and "creates too broad an opt-out" for the security services.
Liverpool West Derby MP Ian Byrne had said he would not be able to support the legislation with the government's amendments included because of "security service carve-outs".
He had tabled amendments of his own that seek to ensure the duty of candour applies to intelligence officers without such exceptions.
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