Three anti-fascist activists have accused an undercover police officer of attempting to incite them to firebomb a shop that was said to be a front for the far right, the spycops inquiry has heard.

The accusation has been levelled against Carlo Soracchi, an officer who spent six years infiltrating anti-fascist and leftwing groups. He has denied the claim.

In testimony to the inquiry, the three activists said Soracchi made the suggestion to set fire to the shop on two occasions. They said they immediately rejected the idea as they had no intention of getting embroiled in any kind of terrorism.

Soracchi is facing claims that he fabricated or exaggerated the secret reports he compiled about the groups he infiltrated.

The spycops inquiry is examining the conduct of about 139 undercover police officers who spied on tens of thousands of mainly leftwing campaigners between 1968 and at least 2010.

Soracchi, who pretended to be an anti-fascist and socialist campaigner between 2000 and 2006, is due to questioned by the inquiry next month.

During his deployment, he formed intimate relationships with three women using his fake identity. He will be questioned about why he deceived the women by concealing his real identity from them.

He will also be questioned about the allegation that he acted as an agent provocateur by attempting to lure the three activists into taking part in an arson attack.

On Monday, Joe Batty, one of the activists, told the inquiry how Soracchi had been at a New Year’s Eve party with the campaigners in 2002.

Soracchi raised the subject of Roberto Fiore, a fascist who was at the time suspected of being involved in bombing a railway station in Italy and fleeing to Britain, he said. It was said that Fiore was running a charity shop near to the party in London to raise money for the far right.

Batty said: “His intention was clearly to pique our intention, and he went so far as to suggest that it would be ‘terrible’ if something like a firebombing were to happen to the building.” That night, a group of the activists walked round to see the shop.

Batty said that a few days later, Soracchi was driving him and another activist, Dan Gillman, through Maida Vale in west London and went past the shop. Again, Soracchi made the same suggestion, according to Batty. “We would never have acted on [Soracchi’s] suggestion,” he added.

Soracchi has rejected the activists’ allegation and has instead accused Gillman of suggesting the firebombing plot. Gillman said this was an “absolute lie”.

At the time, Soracchi did not send a written report to his superiors notifying them that Gillman had made this suggestion. Gillman has previously told the inquiry that Soracchi would have done so if it was true, as he would have sought to justify spying on him and the other activists, particularly as the undercover officer was filing detailed reports of everything they were doing.

“There is no bigger event of public disorder than someone petrol bombing a charity shop. Every single minute conversation that we had, he reported in these really boring reports,” Gillman has told the inquiry.

The third activist, Steve Hedley, has testified that he and others told Soracchi not “to be so stupid” when he made the firebombing suggestion. He said the police wanted to entrap the activists in serious criminality as they had spent years infiltrating the activists “and he’d got absolutely nothing because we weren’t doing anything”.

On Monday, David Barr, the inquiry’s chief barrister, said witnesses had challenged the accuracy of Soracchi’s surveillance reports. He will be questioned about these alleged fabrications.

The inquiry continues.