The NHS chief executive Sir David Nicholson has told the Mid Staffordshire Foundation Trust public inquiry he would like to see the government have power to bring failing foundation trusts back under state control.

This is despite the government this month amending the Health Bill to “remove the ability to de-authorise an FT”.

During his first day of his evidence on Tuesday Sir David accepted his view put him at odds with government policy.

“The ability to renationalise a foundation trust in this situation [Mid Staffs] should be a possibility,” Sir David said. “[The government] wants all organisations to be foundation trusts but I believe that from time to time it may be necessary for the state to take direct management of an organisation.”

He said the new NHS Trust Development Authority should be given the powers to remove foundation status.

Sir David was also asked about his involvement with the trust as interim chief executive of the former Shropshire and Staffordshire SHA between August 2005 and April 2006.

He admitted the SHA was not “alert” to the failings in quality at Mid Staffordshire because it was more focused on local trusts with financial problems.

“Were we alert to the potential of what was happening at Mid Staffordshire and [did we] build that into the work we were doing? The answer is we did not,” Sir David said.

He said the SHA had devoted its energy to organisations with deficits and “at that time quality was not the organising principle of the NHS”.

“I wish it was different… Indeed [this] was one of the reasons that I decided to apply for the job of the chief executive if the NHS,” he added.

However, he rejected South West Staffordshire PCT chief executive William Price’s claim, put to him by inquiry counsel, that SHAs “didn’t give a monkeys” how the books were balanced as long as it happened.

Sir David was also asked about the SHA’s 2005 assessment of Mid Staffordshire’s ability to become an FT. He said he found it worrying at the time that the board could not “articulate” its strategy.

He told the inquiry he had not worried about leadership as the chair and chief executive acknowledged they had a problem with clinical engagement. However, he admitted that in retrospect Martin Yeates was the wrong appointment as chief executive.

Sir David, who advised the trust on his appointment, said although Mr Yeates had the operational capability he had been weak on strategy.