Margaret Thatcher pressed officials to prosecute a controversial Sikh militant amid fears his presence in the UK was damaging relations in India in the wake of the assassination of prime minister Indira Gandhi, according to newly-released government files, Papers released by the National Archives in Kew reveal the prime minister's exasperation as officials insisted there were no grounds for action against Jagjit Singh Chauhan despite his inflammatory rhetoric against the Indian leader.

Mrs Gandhi was gunned down by her Sikh bodyguards on October 31 1984, apparently in reprisal for the Indian army's attack earlier that year on the Golden Temple at Amritsar in which hundreds died.

In the aftermath of her killing angry Indians turned on Britain, complaining that Mr Chauban's repeated attacks on Mrs Gandhi - including an infamous warning that she and her family would be "beheaded" - had been a contributory factor.

The British high commissioner in New Delhi, Sir Robert Wade-Gery, said there were real fears that her son and successor as prime minister, Rajiv Gandhi, could suffer the same fate with serious consequences for British interests if Mr Chauban remained active in the UK.

"Rajiv Gandhi's entourage are extremely angry with us," he cabled the Foreign Office.

"They are driven by a real fear that our inaction, having already been in their belief, substantiated or not, a contributory factor to the murder of Mrs Gandhi, is continuing to contribute materially to the danger of Rajiv being similarly killed.

"We must also reckon that there is an odds-on chance of an attempt being made on Rajiv's life in the next few months, probably by Sikhs, and that, if this happens while we are still tolerating Chauhan, the effect on all our interests here could be catastrophic.

"Lives and property could be lost as well as contracts and influence."

He warned that with a number of potential trade deals in the balance, UK firms could face economic reprisals.

With Mr Chauban continuing to insist that Mrs Gandhi had deserved to die and predicting her son would be killed as well, Mrs Thatcher demanded to know why no action had been taken against him.

The Home Office, however, said that the police, the attorney general and the director of public prosecutions had all agreed there were no grounds for prosecution. Mrs Thtacher was furious and demanded a full file on Mr Chauhan's public utterances.

"The Prime Minister has now been through these in detail," her senior adviser Charles Powell wrote back.

"She does not see how Chauhan can evade the charge of inciting to violence simply by saying he is not doing so,when the natural meaning of his words clearly indicates that he is.

"The Prime Minister is of the view that the Law Officers might with advantage study the papers once more."

For once, however, her intervention failed to produce her desired result and no prosecution followed.

Previous files released by the National Archives sparked controversy when they appeared to indicate the SAS had advised the Indian military in the run-up to the attack on the Golden Temple, although a subsequent inquiry concluded the advice had only a "limited impact" on the operation.