The former agent, who cannot be identified for security reasons, is now serving a life term for the murder he claims was committed as a result of post-traumatic stress disorder (PTSD) from his spy mission, The Sunday Times reported.
He is seeking damages and is appealing against his murder conviction on the grounds of diminished responsibility due to PTSD.
While in Pakistan, he claims, he was tortured, witnessed executions and lived in constant fear of being exposed as a British spy.
Working undercover with the Taliban in Pakistan, he claims he saw a man, woman and child beheaded as suspected spies and was told to pick up the severed head of the dead child and show it to the crowd as a warning from the terror group.
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"It was absolutely horrible, but I had to do it. I had no choice, otherwise I would have been suspected of being a spy," he said.
"I was beaten every day for over a month. I lost teeth and had my toenails pulled out by pliers," he said.
He was released and returned to Britain, but suffered nightmares and flashbacks to atrocities, becoming angry for no reason.He told his intelligence handlers but received no help.
MI5 has sought to keep the case out of the public eye, the report claims.
The security service initially denied that he was one of its agents. However, when it became apparent that details of his secret life would be made public in court, the Crown Prosecution Service called for the large segments of the trial be held in-camera.
"This whole tragic situation could have been avoided if he had been treated properly, with the right care. MI5 used him with complete disregard to the consequences. They should understand that they have a responsibility to their staff and civilian agents as well as to the country."
MI5, MI6, the attorney-general's office and the Home Office has declined to comment so far.