"Should the circumstances be as we now fear, the government will set up an independent inquiry led by a senior judge into the death of Dr Kelly," a defence ministry spokeswoman said.

"But it is right that we await formal identification by the police and that we inform the family."

She added that the inquiry would begin "very soon" after formal identification, which is to be given on Saturday.

British police said earlier on Friday that the body matched Kelly's description.

It is understood that Lord Brian Hutton, a former Lord Chief Justice of Northern Ireland, will oversee the inquiry into the circumstances surrounding the death, the defence ministry spokeswoman said.

Kelly, 59, was identified as the possible source behind a BBC report in May that Blair's office "sexed up" a dossier on Baghdad's weapons capabilities that was used to justify the war on Iraq in March.

Kelly disappeared on Thursday, two days after facing a parliamentary committee investigating the affair. During his interrogation, Kelly denied being the main source for the BBC report.

Prime Minister Tony Blair's official spokesman first announced plans for a possible inquiry aboard a plane flying Blair to Tokyo on Friday.

"If it is Dr Kelly, it will be the ministry of defence's intention to hold an independent judicial inquiry into the circumstances of his death. It goes without saying that the government will cooperate fully," the spokesman told reporters just before the plane touched down on Blair's first leg of a tour of East Asia.

"I do not think today is the time to rush to judgement or jump to conclusions," the spokesman added.

The leader of Britain's opposition Liberal Democrats, Charles Kennedy, welcomed the announcement of a possible inquiry.

"I welcome the fact the prime minister has said there will obviously have to be a full-scale inquiry into what on earth led to this happening.

"It would be wrong to comment further before we have more details of that but at the moment this is a desperately sad turn of events."

WAR.WIRE