MI5 and the Foreign Office faced criticism yesterday from the parliamentary spy watchdog for playing down the terrorist threat in Indonesia days before the Bali nightclub bomb.

It said the security services failed to respond to renewed intelligence reports that tourists could be a terrorist target, and to a failed grenade attack on an American diplomatic residence in Indonesia just three weeks before the Bali atrocity – which killed more than 190 people including 26 Britons.

The Intelligence and Security Committee said the threat to British interests should have been raised from "significant" to "high". The committee, which comprises senior MPs and peers, stressed that it did not believe the 12 October attack could have been averted. But it said: "A threat existed to Western tourists in Indonesia; the largest concentration of Western tourists there is on Bali; and they gather in large numbers in a limited number of nightclubs.

"These facts should have been recognised by the Security Service as pointing to a potential target." It concluded: "This was a serious misjudgement and meant that the Security Service did not assess the threat correctly." The committee also complained the advice issued as a result by the Foreign Office for travellers to Indonesia did not "describe the terrorist threat sufficiently starkly to draw readers' attention to it".

Jack Straw, the Foreign Secretary, told MPs that its travel advice would be comprehensively reviewed after it failed to "accurately reflect" the terrorist threat in Bali. But he added: "The staff of the Security Service have to make fine judgements based on fragmentary intelligence and other information."

Michael Ancram, the shadow Foreign Secretary, urged the Government to act "swiftly, comprehensively and sufficiently openly" to restore public confidence. He suggested that the Australian government had learnt the lessons of Bali more quickly, by warning its citizens against "non- essential" travel to Mombasa ahead of last month's bomb attack. By contrast Britain advised: "There may be an increased terrorism threat."

Mr Straw replied that there was no intelligence information available that could have prevented the attacks in Kenya.

The committee chairman, the former cabinet Minister Ann Taylor, urged the Government to ensure the MI5 review was as quick as possible. "The committee did not lightly reach its conclusion that there was a serious misjudgement in terms of the threat assessment that was made in terms of Bali," she told MPs.

Meanwhile, British universities have been warned that they could be infiltrated by terrorist groups seeking germ warfare agents.

The Commons Foreign Affairs Committee said international terrorist supporters could lay their hands on a range of deadly biological materials simply by signing up for postgraduate scientific research courses. The current voluntary system of vetting overseas students seeking education courses where they would have access to dangerous materials was inadequate and needed to be strengthened, the committee of MPs warned in a report.

A vetting scheme was set up after the discovery that the head of the Iraqi biological weapons programme, Rihab Taba, studied plant diseases at the University of East Anglia in the 1980s. But the committee said the precautions did not cover the NHS or wholly commercial laboratories.