Suspected spy 'confesses to working for Russians'

Juan Lazaro admits he was on intelligence service’s payroll as alleged paymaster goes missing after being granted bail in Cyprus

One of the suspects in an alleged spy ring has confessed to federal agents that he worked for Russia's intelligence service, federal prosecutors said last night.

New details of the case against Juan Lazaro and Vicky Palaez, a journalist with a Spanish language newspaper in New York whom he lived with, were released last night, including a confession from the former that he had worked for Russia's intelligence service, that Lazaro was not his real name and that the house where and his co-defendant lived was paid for by the "Service" – or Russian intelligence.

According to prosecutors, Mr Lazaro won't even concede that although he "loved his son" – a 17-year-old born to the defendants – "he would not violate his loyalty to the service even for his son".

The revelations came on a day when several defendants in the case were making court appearances, and prosecutors also announced that they had discovered $80,000 (£53,000) in new, hundred-dollar bills in the safe-deposit box of two others.

Government lawyers yesterday pleaded with a judge not to consider bail for Mr Lazaro and Ms Palaez following events in Cyprus where the suspected paymaster, Christopher Metsos, who was arrested on Tuesday, had been given bail, a decision which was swiftly followed by his disappearance, perhaps across the border into the Turkish north of the island.

American prosecutors have been scrambling to shore up their case against the 10 suspects, arguing fiercely against requests for bail. They said: "There is little need here for speculation as to what will happen if the defendants are permitted to walk out of the court," they said, adding, "As Metsos did, they will flee."

Insisting that the evidence against their clients was flimsy, defence lawyers went before judges in the US asking that they be allowed free pending their trials. Prosecutors responded by unveiling the additional evidence that they said left no doubt that they had indeed been in the pay of Russian intelligence. They argued that the defendants, if granted bail, would only have to reach a Russian embassy or the Russian consulate to the United Nations in New York to be beyond their reach.

In Cyprus, the drama even reached the office of the country's president where an angry US ambassador asked why Mr Metsos had been set free. "As we had feared, having been given unnecessarily the chance to flee, Mr Metsos did so," a spokesman for the US Embassy in Cyprus said, abandoning diplomatic niceties. As he spoke, Cypriot authorities scoured ports and border crossing for the missing man.

Other suspects appeared in separate courtrooms in Boston and New Jersey also asking for bail. First up were Donald Heathfield and his wife Tracey Lee Ann Foley in a Boston court. The couple entered in handcuffs and leg shackles, and smiled at their waving sons across the courtroom. After the hearing, Mr Heathfield's attorney said the evidence revealed so far against his client was "extremely thin"; the judge had granted a delay until 16 July to give the couple's defence team time to prepare.

In Cyprus, the public got their first glimpse of the alleged paymaster, Mr Metsos. Cypriot police released a photograph taken on Tuesday after Mr Metsos was arrested at the airport about to board a flight to Hungary and before he was released on bail.

The 55-year-old is accused of having bankrolled the spy ring for more than a decade, passing envelopes full of cash to them in Cold War-style "drop offs" and, in one case, burying a large stash of bank notes in a secret location, where they were later unearthed by one of his agents. Speculation swirled yesterday as to whether the Cypriot magistrate, Christos Philippos – who rejected a police request to hold Mr Metsos until an extradition hearing and instead freed him on bail – was simply guilty of naivety or caught up in a wider conspiracy.

The Cypriot Justice minister, Loucas Louca, was forced to admit yesterday that the decision to allow an alleged spymaster back on to the streets "may have been mistaken".

But he said the authorities were chasing possible leads. "We have some information and we hope that we will arrest him soon," the minister told reporters. The alarm was raised on Wednesday when Mr Metsos failed to check in with police in line with the conditions of his bail, and also failed to get in touch with his lawyer.

Yesterday it emerged that Mr Metsos had apparently cleared out his holiday apartment in the seaside town of Larnaca, leaving behind a pair of slippers and a "please do not disturb" sign on the door. Security officials fear he may have slipped across the notoriously porous border – just 12 miles away – and into the Turkish-run north of the island, a diplomatic no-man's land. The breakaway enclave is not recognised by the international community.