It was a fine autumn day on Sunday November 4 1956, Max Morris remembers, when the British Communist party executive committee convened for a highly charged session. The news from Budapest was getting worse. Soviet forces were moving into the city, using massive T54 tanks to shell rebel strongholds. The party paper, the Daily Worker, had been sticking to the official line about "counter-revolution" and "fascist activities". But disquiet was growing.

In Trafalgar Square, a few minutes from CP headquarters in King Street, Covent Garden, thousands were gathering to demonstrate against the Anglo-French attack on Egypt. The RAF had already bombed Cairo and the crowds were chanting "law not war" - later surging down Whitehall into earshot of Anthony Eden in Downing Street. The Port Said landings were just hours away.

Unease
By rights, the comrades should have been protesting against the aggression in the Middle East. But they were preoccupied with their own problems. They knew their condemnation of Eden's response to the Suez Canal nationalisation rang hollow when the Red Army was mowing down Hungarian workers. They didn't know the British government was listening in on their deliberations. When the meeting got under way John Gollan, the new general secretary, set a defiant tone: "Imperialism," he insisted, "was trying to regain ground. If the rebels won, it would be a victory for reaction and Hungary would become a fascist base with a dagger pointed at the socialist countries. The Red Army was therefore right to intervene."

"It was curious," reflects Morris, now a sprightly 94 and the only surviving member of the executive. "The meeting was interrupted several times to listen to the radio about what was happening in Budapest." Gollan was backed by Rajani Palme Dutt, the party ideologue. Others voiced unease. But when a vote was taken, only Morris and his friend Arnold Kettle opposed the statement that "the action of the Soviet forces in Hungary should be supported by communists and socialists everywhere". "To my astonishment even those who had spoken critically voted for the resolution in the end," Morris recalls.

For the historian and then party member Eric Hobsbawm, 1956 was the year "British communists lived on the edge of the political equivalent of a collective nervous breakdown". In February, Nikita Khrushchev's secret speech to the 20th Soviet Communist party congress stunned them by exposing and condemning Stalin's crimes. Later came a thaw - especially in Poland, where the "national communist" Wladyslaw Gomulka was allowed to take power.

But the events of late October and November pushed thousands of communists over the precipice into what became the new left, into Trotskyist groups, rightwards to the Labour party, or out of politics altogether. Some who kept their faith then saw it tested again in 1968, when Soviet tanks crushed Czechoslovakia's "Prague Spring".

Earlier in the year, Dutt had dismissed Stalin's "errors" as "spots on the sun" and rebuffed doubters with statistics of Soviet pig iron production. But what the education organiser, James Klugmann (who recruited the spies of the "Cambridge Comintern"), referred to jokingly as "this Joe business" wouldn't go away.

Signs of turmoil were evident from letters and tortuously worded articles in the Daily Worker and bitter speeches at branch meetings. "It was a very confused situation in which different elements were pulling in different directions," remembers Monty Johnstone, then editor of the Young Communist League magazine. "The party line was that these things had already been dealt with and there was no need to waste time discussing them."

British communists assumed they were being monitored (some still have suspicions about an informer high in party ranks), but they had no idea how closely. In fact, documents in the National Archives show that the government knew far more than ordinary members. MI5 had planted listening devices in King Street in 1942, one probably concealed in a wooden batten in the executive meeting room.

Near-verbatim accounts of conversations involving Gollan and his predecessor Harry Pollitt suggest there were bugs or microphones elsewhere too. MI5 obtained a fascinating description of Pollitt recalling "how cocksure Khrushchev had been that the unpleasant effects of the denunciation of Stalin ... would blow over in a few months." The spooks knew Pollitt and Dutt had been in Moscow for the 20th congress but had received no information from the Russians.

Such reports to the Joint Intelligence Committee - Whitehall's clearing house for classified assessments - give an extraordinarily detailed picture of the strains in the party over that tempestuous summer and autumn. "Two communist dons" referred to in a top secret MI5 document were making waves with an unauthorised publication called The Reasoner, which questioned the official line on Stalinism, democracy, Poland - and, most spectacularly, on Hungary.

The two were the historians John Saville and EP Thompson. By chance, the third edition of their samizdat was ready for printing just as the terrible news came through from Hungary on November 4. Thompson quickly penned a new editorial entitled "Through the Smoke of Budapest". It was powerful, polemical - and prophetic.

"Even the urgency of the Egyptian crisis cannot disguise the fact that the events of Budapest represent a crucial turning point for our party," wrote Thompson, admired then as now for his passion and eloquence. "The aggression of British imperialism is uglier and more cynical in degree than previous imperialist aggressions. But the crisis in world communism is now different in kind."

Dorothy Thompson, like her husband, had been uneasy about Stalin's personality cult long before his death in 1953, but still felt a sense of lingering loyalty. "Our experience of the Soviet Union was of the Red Army, and we knew what whoppers the capitalist press did make up about aspects of Soviet society," she explains. "The only possible way forward was socialism, so it was 'socialism or barbarism'. And that was the great intellectual trap that meant we did excuse an awful lot of appalling behaviour on the grounds that it was pushing the necessary buttons to move to the new post-capitalist form of society."

The disenchantment was cumulative - the revelations of the secret speech, the manipulation of the democratic process, the lying, the reprimands for breaches of discipline. Hungary, though, was the straw that broke the comrades' backs. "It was the decisive moment," says Dorothy Thompson. "But we would have left the party anyway."

Bert Ramelson, the Russian-speaking party organiser in Leeds, came to the couple's Halifax home to plead with them not to leave. It was in vain.

Developments at the Daily Worker both reflected and exacerbated the crisis. The paper's difficulties were obvious when riots erupted in the Polish city of Poznan. On July 3, its first edition carried the headline "Poznan rioters had been drilled in murder". In later editions, it read: "Poznan workers speak out against grievances". Worse was to come when the uprising began in Budapest on October 23. Johnnie Campbell, the editor, sent reporter Peter Fryer to Hungary. Gollan had been reading reports in other papers and, MI5 recorded, "was particularly depressed by one about Russian tanks shooting down Hungarians. He called it blood-curdling. He expressed the hope that Fryer would be able to contradict that sort of thing ... These hopes were short-lived."

The problem was that Fryer (whom Campbell dismissed as "clearly out of his mind") completely contradicted the CP analysis that the uprising was a "fascist-reactionary" attempt to destroy socialism and restore capitalism. Two of his three dispatches were spiked and the third heavily edited.

"The events in Hungary, far from being a fascist plot, were a revolution by the vast majority of the people against the despotic rule of the Stalinist bureaucracy," Fryer wrote later. The Daily Worker played up reports of lynchings (mostly of the AVO secret police) and of communists being beaten to death. Fryer resigned and sent his letter of resignation to the Manchester Guardian.

Raw anger
Now 79 and in poor health, Fryer is reluctant to revisit these distant events. But Hungarian Tragedy, the book he wrote in 1956, still exudes the raw anger of a young man following his conscience to challenge party discipline. He went on to do much-praised work on race relations, but is still best remembered for his courageous stance on Hungary. "Peter's a nice man," says Max Morris, a neighbour in north London, "but he's an old-fashioned, unashamed Trotskyist". Old sectarian habits die hard.

Nineteen Daily Worker journalists resigned. Communists were reduced to reading the Daily Telegraph to find out what was happening. Alison Macleod, the Daily Worker's TV critic, described how "all around us the marriages of party members were cracking up". Everywhere friendships were under strain. The Thompsons fell out with the Kettles. Another friend, the philosopher Maurice Cornforth, stayed in the party, but guiltily sent the Thompsons a cheque for £50 when Imre Nagy, the reformist Hungarian Communist leader, was executed in 1958.

By January 1957, the CP had lost 9,000 members, including leaders of the Fire Brigades Union and the Scottish miners - a quarter of its total strength. Others kept their heads down. Max Morris, despite his dissenting vote, stayed on. Chimen Abramsky, a Russian-born Jewish historian, was a member of the international secretariat, dominated by Dutt. His wife, Miriam, left the party straight after Hungary, but he hung on.

"I was totally naive and utopian to believe I could change the party line from within," he admits ruefully. "But I was knocking my head against a brick wall."

Abramsky, now 90, left in 1958 in solidarity with Hyman Levy, expelled for an unauthorised pamphlet on anti-semitism in the USSR. Abramsky waited 40 years for a reconciliation with a comrade who wanted to apologise before he died. "It was more than membership of the party. It was your whole life." He proudly shows visitors signed copies of books by luminaries such as Pollitt, but he shudders still at how wrong they were. And he remains angry with Hobsbawm, the most prominent intellectual not to leave in 1956."There are many omissions in his autobiography that I find a bit dishonest," he says. Dorothy Thompson agrees: "Why did Eric stay? Nobody whom he respected intellectually stayed in." She crossed him off her Christmas card list in 1998, when he became a Companion of Honour.

Hobsbawm, who grew up in Weimar Berlin, is often asked why he stayed in the CP "longer than most". He answered in his book, Interesting Times: "I belonged to the generation tied by an almost unbreakable umbilical cord to hope of the world revolution, and of its original home, the USSR. For someone who joined where I came from and when I did, it was quite simply more difficult to break with the party than for those who came later and from elsewhere." Pride played its part, too.

"Hungary was, in some way, the betrayal of everything that we'd actively believed in," he told me ahead of the anniversary of the Budapest uprising. But when I asked about the resentment of his former comrades, he simply referred me back to his memoirs.

Still the wounds fester, 50 years on.