Fr James Chesney was transferred, outside the jurisdiction, to a parish in Co Donegal, following secret talks between the then secretary of state William Whitelaw and the head of the Catholic Church in Ireland, Cardinal William Conway.
The two men discussed the scandal after being approached by a senior Royal Ulster Constabulary (RUC) officer as the police were apparently reluctant to arrest the cleric for fear of inflaming the security situation.
Nine people, including an eight-year-old girl, were killed and 30 were injured when three car bombs exploded in the quiet Co Derry village in July 1972.
No one has ever been charged with the murders, which happened on the same day as British troops stormed republican no-go areas in Derry in Operation Motorman.
That happened just six months after the Bloody Sunday killings of 13 civilians by soldiers in Derry when Martin McGuinness, now the Deputy First Minister, was the IRA’s second- in-command in the city.
Fr Chesney, who died in 1980 aged 46, has long been suspected as the IRA man who masterminded the atrocity but yesterday’s damning report by Northern Ireland Police Ombudsman Al Hutchinson also revealed the part played by the RUC in the cover-up.
Mr Hutchinson’s officers examined diaries belonging to Cardinal Conway which confirmed contact with him and Mr Whitelaw over the rogue cleric and correspondence between the RUC, which was led by chief constable Graham Shillington, and the government.
Mr Whitelaw, a minister in Edward Heath’s Tory government, died in 1999, Cardinal Conway in 1977 and Mr Shillington in 2001.
Findings in Mr Hutchinson’s report disclosed:
* Detectives believed Fr Chesney was the IRA’s director of operations in south Derry and was a prime suspect in the Claudy attack and other terrorist incidents.
* A detective’s request to arrest the cleric was refused by an assistant chief constable of RUC Special Branch who instead said “matters are in hand”.
* The same senior officer wrote to the government about what action could betaken to “render harmless a dangerous priest” and asked if the matter could be raised with the Church’s hierarchy.
* In December 1972, Mr Whitelaw met Cardinal Conway to discuss the issue. According to a Northern Ireland Office official, “the cardinal said he knew the priest was a very bad man and would see what could be done”. The church leader mentioned “the possibility of transferring him to Donegal...”
* In response to this memo, RUC chief constable Graham Shillington noted: “I would prefer a transfer to Tipperary.”
* An entry in Cardinal Conway’s diary on December 5, 1972, confirmed a meeting with Mr Whitelaw took place and stated there had been “a rather disturbing tete-a-tete at the end about C”.
* In another diary entry two months later, the cardinal noted that he had discussed the issue with Fr Chesney’s superior and that “the superior however had given him orders to stay where he was on sick leave until further notice”.
Fr Chesney was transferred across the border to Co Donegal in late 1973 and never ministered again in the North. According to Church records, he denied involvement in the attacks when questioned by his superiors.
But he died seven years later having never faced police interview.
Mr Hutchinson said there was no evidence that the police had information that could have prevented the attack.
However, he said the RUC’s decision to ask the government to resolve the matter with the Church, and then accept the outcome, was wrong.
“The decision failed those who were murdered, injured and bereaved in the bombing,” he said.
“The police officers who were working on the investigation were also undermined.”
Mr Hutchinson said the decisions made must be considered in the context of the time.
“I accept that 1972 was one of the worst years of the Troubles and that the arrest of a priest might well have aggravated the security situation,” he said.
“Equally, I consider that the police failure to investigate someone they suspected of involvement in acts of terrorism could, in itself, have had serious consequences.”
Mr Hutchinson said his investigation found no evidence of criminal intent on the part of any government minister or official or any Church official.
But he added: “The morality or ‘rightness’ of the decision taken by the government and the Catholic Church in agreeing to the RUC request is another matter entirely and requires further public debate.”
NINE people were killed in the Claudy bombings. Young and old died, five Roman Catholics and four Protestants – the attack did not discriminate.
Here is a list of the dead:
* Patrick Connolly, 15, Catholic: The teenager died in hospital more than a week after being caught up in the first blast outside McElhinney’s pub and shop.
* Kathryn Eakin, 8, Protestant: The young girl was cleaning the windows of the family’s grocery shop on Main Street when the first bomb exploded.
* Arthur Hone, 38, Catholic: The married father of two died a fortnight after the bombing. Two of his uncles – both priests – conducted a requiem Mass at the insurance salesman’s funeral.
* Joseph McCluskey, 39, Protestant: The factory worker died instantly when the first bomb detonated.
* Elizabeth McElhinney, 59, Catholic: The owner of the pub and shop where the first car bomb went off was serving petrol from the shop’s pump when she was killed.
* James McClelland, 65, Protestant: The street cleaner was killed by the third and final bomb contained in a mini van.
* Rose McLaughlin, 52, Catholic: The mother of eight and cafe owner died in hospital four days after the outrage.
* David Miller, 60, Protestant: The street cleaner was killed by the third blast.
* William Temple, 16, Protestant: The milkman’s helper from nearby Donemana, Co Tyrone, was on his round when the bombs went off.