The surprise explanation behind the U.S. government's sensational but false warnings about mysterious Canadian spy coins is the harmless poppy quarter, the world's first colourized coin.

The odd-looking coins were so unfamiliar to suspicious U.S. army contractors travelling in Canada that they filed confidential espionage accounts about them.

The worried contractors described the coins as "anomalous" and "filled with something manmade that looked like nanotechnology," said once-classified U.S. government reports and e-mails.

The 25-cent piece features the red image of a poppy inlaid over a maple leaf. The quarter is identical to the coins pictured and described as suspicious in the contractors' accounts.

The supposed nanotechnology actually was a conventional protective coating the Royal Canadian Mint applied to prevent the poppy's red colour from rubbing off. The mint produced nearly 30 million such quarters in 2004 commemorating Canada's 117,000 war dead.

"It did not appear to be electronic [analog] in nature or have a power source," wrote one U.S. contractor, who discovered the coin in the cup holder of a rental car.

"Under high-power microscope, it appeared to be complex consisting of several layers of clear but different material, with a wire-like mesh suspended on top."

The confidential accounts led to a sensational warning from the U.S. Defence Security Service, an agency of the Defence Department, that mysterious coins with radio frequency transmitters were found planted on U.S. contractors with classified security clearances on at least three separate occasions between October 2005 and January 2006 as the contractors travelled through Canada.

One contractor believed someone had placed two of the quarters in an outer coat pocket after the contractor had emptied the pocket hours earlier.

"Coat pockets were empty that morning and I was keeping all of my coins in a plastic bag in my inner coat pocket," the contractor wrote.

Meanwhile, in Canada, senior intelligence officials expressed annoyance with the U.S. spy-coin warnings as they tried to learn more about the oddball claims.

"That story about Canadians planting coins in the pockets of defence contractors will not go away," Luc Portelance, now deputy director for the Canadian Security Intelligence Service, wrote in a January e-mail to a subordinate.

'What's the story on this?'

"Could someone tell me more? Where do we stand and what's the story on this?"

Others in Canada's spy service also were searching for answers.

"We would be very interested in any more detail you may have on the validity of the comment related to the use of Canadian coins in this manner," another intelligence official wrote in an e-mail. "If it is accurate, are they talking industrial or state espionage? If the latter, who?" The identity of the e-mail's recipient was censored.

Intelligence and technology experts were flabbergasted by the warning when it was first publicized earlier this year. The warning suggested such transmitters could be used surreptitiously to track the movements of people carrying the coins.

"I thought the whole thing was preposterous, to think you could tag an individual with a coin and think they wouldn't give it away or spend it," said H. Keith Melton, a leading intelligence historian.

The Defence Security Service disavowed its warning about spy coins after an international furore but until now it has never disclosed the details behind the embarrassing episode. The United States said it never substantiated the contractors' claims and performed an internal review to determine how the false information was included in a 29-page published report about espionage concerns.

Coins not examined

The Defence Security Service never examined the suspicious coins, spokeswoman Cindy McGovern said.

"We know where we made the mistake," she said.

"The information wasn't properly vetted. While these coins aroused suspicion, there ultimately was nothing there."

Numismatist Dennis Pike, of Canadian Coin & Currency near Toronto, quickly matched a grainy image and physical descriptions of the suspect coins in the contractors' confidential accounts to the 25-cent poppy piece.

"It's not uncommon at all," Pike said.

He added the coin's protective coating glows peculiarly under ultraviolet light.

"That may have been a little bit suspicious," he said.