Recognising the potential for a damaging controversy, Mr Paddy Duffy had acted very promptly in offering his resignation, the Taoiseach told the Dail.

Mr Ahern was answering questions on Mr Duffy's resignation earlier this month following the revelation in The Irish Times that he was a director of a public affairs company, Dillon Consultants, which had advised NTL, the successful bidder for Cablelink.

"There have undoubtedly been unfortunate mistakes, misunderstandings and errors of judgment. But there are also dangers in taking decisions or forming judgments too quickly on the basis of bad appearances, which have devastating consequences for individuals who have sought at all times, by their own lights, to act with honour and integrity," said Mr Ahern.

"From the point of view of public ethics, that legislation is still in its infancy. We can all learn from the experience, and I believe that there may be cautionary lessons which have an application that go far beyond the individual involved."

The problem that arose, he said, was that a special adviser was arguably in the process of forming a relationship with a private company which would be important for his future career after leaving the public service. "That company was, most probably due to a serious misunderstanding, already advertising the special adviser on the Internet as an asset. It underlines the dangers of forming even a tentative relationship with a commercial company dealing with the State prior to leaving the public service."

Mr Ahern said that on December 9th last Mr Duffy was made a director of Dillon Consultants with effect from that date, on the basis that he would take up employment early in the New Year. Part of the deal was that he would take up a 5 per cent share in the company. Papers with his signature were subsequently lodged in the companies office on March 12th last.

"I do not have any documentary evidence showing that he ceased to be a director, nor does Paul Dillon recall any specific request to take him off the list of directors. "But I am informed that after about a week of reflection and consideration, during which he apparently decided to stay on in my Department for another year, he informed Paul Dillon orally that he did not wish to take up the job for another year and returned the shares.

"I understand those transactions will be shown in the company's accounts, to be filed at the end of this year. He apparently believed that returning the shares would ipso facto remove him from any directorship, and furthermore, his signature, while a sign of serious intent to consider the position, was not a definitive or operational acceptance, but subject to a final decision."

He said that last February a meeting apparently took place in London between Dillon Associates and APCO, a large international public affairs consultancy. Mr Duffy attended the meeting, which he claimed was not a board meeting, solely to discuss the role he would play in Dillons in partnership with APCO. When Mr Duffy signed his statement of interest last January under the Ethics in Public Office Act, 1995, he did not declare a directorship in Dillons, which he clearly did not believe he possessed, said Mr Ahern. The Taoiseach said that an article in the Irish Independent had stated that Dillons had lobbied the Government's millennium committee on behalf of the Gaiety Theatre, which was seeking a £5 million grant. "Mr Dillon was a member of the 15-member millennium committee and also part of a smaller group that attended a presentation by the Gaiety organised by Dillons. I am informed by Dillons that they had no involvement in, or knowledge of, any earlier proposal for the State to purchase the Gaeity Theatre."

Mr Ahern said it was "inappropriate" for Mr Duffy to have a relationship with an outside company when he was special adviser in the Department of the Taoiseach.

Amid sharp exchanges with the Opposition, the Taoiseach was accused by the Fine Gael leader, Mr John Bruton, of being "derelict in his duty".

The Taoiseach said Mr Bruton was "just mudslinging against a decent person".

Pressed by the Opposition, Mr Ahern said: "Mr Paddy Duffy, as far as I am concerned, is a very good official who has worked hard for this country as a teacher, far beyond the call of duty, and as an official with me. He is a teacher, not a business person. He made a bad mistake in thinking that by giving back the shares and saying that he did not want the job his name would be cancelled. He has accepted that fulsomely."

Replying to Mr Pat Rabbitte (Labour, Dublin South West) he said he had known Mr Duffy for 25 years and he was not a person who deliberately told untruths. "But he did make a fundamental mistake . . . He paid the price."

The Labour deputy leader, Mr Brendan Howlin, said the totality of the Taoiseach's inquiry after a discussion with the Minister for Public Enterprise, Ms O'Rourke, was a conversation with Mr Duffy, notwithstanding the fact that at that time the Dillon website was touting the fact that Mr Duffy had significant political influence and was an asset to Dillon Consultants. "Was that not checked out by your department, or were you not aware of that?"

Mr Ahern said he was not aware of the website, and Mr Duffy was trenchantly of the view that he had nothing to do with the company. Mr Howlin said: "Do you not find it very hard for us to believe that Mr Duffy would attend a meeting of APCO, believing that it was a personal matter to discuss his future employment while still acting as the Taoiseach's personal adviser? At the same time, a website for Dillon Consultants advertised his closeness to the Taoiseach as one of the advantages Dillon Consultants had. "Is it not very hard to believe, with all that reality there, that Mr Duffy was totally unaware that he was actually a non-executive director of Dillon Consultants, although he signed the legal requirement to be such a director at the end of last year?"

Mr Ahern replied: "I have to say that I have come to the conclusion that it is so stupid it is probably believable." Mr Bruton remarked that this was a very good summary of the Taoiseach's approach to the matter. He said it was not unreasonable to say the Taoiseach probably met Mr Duffy three or four times a day, and that their offices were on the same corridor. "How then is it justifiable that Mr Duffy did not have an opportunity to explain to the Taoiseach of his contacts with Dillons?" Mr Ahern replied: "Because he did not inform me."