Allegations that a rifle later used in the atrocity was moved before officers could recover it are being examined by the Northern Ireland Police Ombudsman Nuala O’Loan.
Mr Dallat said a Royal Irish Regiment (RIR) soldier had backed up his concerns. He said: “In recent weeks a serving member of the RIR telephoned me to say the guns were moved by a member of the Special Branch who was protecting the identity of Knight, who was a double agent.
“He went on to claim that one of the guns was used at Greysteel, while the whereabouts of the other is unknown.
“His knowledge of the event clearly indicates that his call is genuine.”
Knight, 36, was part of an Ulster Freedom Fighters (UFF) team behind the horrific attack on the Rising Sun bar in Greysteel, Co Down, on Hallowe’en, 1993. Gunmen walked into the packed pub, shouted “Trick or treat” and opened fire on drinkers.
By the time they had finished, 19 people were wounded. Eight died from their injuries, seven of them Catholics.
Knight was jailed for life for those murders and the killing of four Catholic workmen in Castlerock, Co Derry, seven months earlier.
He was released from jail in July 2000 under the terms of the Good Friday Agreement, supposedly having found God from his cell at the Maze Prison.
Since then he is believed to have left the North and moved to England.
But Mr Dallat, who has been studying the case for years, has disclosed new details of a weapons find he was told of between the attacks in Castlerock and Greysteel. Two high-powered rifles belonging to the UFF were discovered by anglers on the Agivey River at Hunter’s Mill, near Aghadowey, Co Derry.
“The find was reported to me and passed on to a senior police officer in Coleraine who immediately organised a search without results,” the East Derry MLA said.
“This was a dreadful period in East Derry when 14 Catholics and five Protestants were murdered between 1991 and 1994.
“Much of the detail has been with the Police Ombudsman for a considerable period of time, and I am glad that now there is an official search to find why many of those who lost their lives were not protected.”
He added that, after the Castlerock murders, a senior police officer reassured him that the UFF gang was being closely watched and arrests would follow.
“It was during this time that the guns were discovered. There was no dispute that the UFF had carried out the killings,” Mr Dallat claimed. “I have waited a long time for this investigation and I hope the investigation team are successful in gleaning why so many innocent people lost their lives and why the UFF ran amok for so long before finally being caught.”
An investigating officer from the ombudsman’s office has confirmed to Mr Dallat that his concerns were being probed.
“We are currently conducting initial research with regard to the allegations contained within your draft witness statement,” he was told in a letter.
A Police Service of Northern Ireland spokeswoman refused to comment on the case.