The Swedish intelligence service's James Bond-themed spy party contained all the ingredients 007 himself would approve of: martinis (shaken, not stirred), casino tables, a gala dinner, and special guests, including the head of the UK's MI5 security agency, Jonathan Evans.

However, it has since emerged that the lavish event cost 5.3m Swedish krona (£508,000) and Sapo, Sweden's intelligence service, is now struggling to explain the expense, especially as the party took place after stringent budget cuts within the organisation.

"This was a unique and extraordinary time," General Anders Thornberg, the head of Sapo, told Sweden's Dagens Nyheter newspaper in an interview published yesterday. Referring to the unprecedented terrorist threats and attacks targeting Sweden in the years before the party, he added: "We thought that we needed a special gathering for the whole security police team."

Islamic extremist groups were suspected of plotting against Sweden in 2010; one man was killed and two were injured in a suicide bombing in Stockholm in December that year. "We'd been subjected to extreme pressure," General Thornberg said.

Embarrassing questions have now been raised about Sapo's spending habits. Critics have pointed out that the intelligence agency was in breach of Sweden's public spending rules because Sapo failed to invite competitive bids for the event. The agency has come under particular scrutiny because its reorganisation had been designed to reduce costs to the taxpayer.

General Thornberg also conceded Sapo had compounded its misconduct by wrongly demanding VAT refunds worth up to £96,000 after the party.

Sweden's Justice Minister, Beatrice Ask, is yet to comment. However, the disclosures have prompted the former Sapo chief, who organised the party, to apologise. Anders Danielsson told Dagens Nyheter: "I take responsibility for everything. If it's wrong, it's wrong… It will be sorted."

The event is the latest in a series of scandals involving Swedish government bodies throwing parties funded with taxpayers' money. Earlier this month, Sweden's Ministry of Enterprise was asked to submit documents concerning the funding of its 2011 Christmas bash, which the ministry had tried to write off as a "seminar activity" to avoid paying VAT on it. Sweden's Federation of Strategic Research was also found to have spent around one million krona (£96,000) of research funds on a party to celebrate its 15th birthday.