The UVF held secret talks with the IRA army council in 1988 to discuss the prospect of a federal Ireland, state papers in Dublin have claimed.
The meetings were facilitated by Father John Murphy, a chaplain in the Maze Prison, documents marked "secret" reported.
The memo, to the Taoiseach's office in November 1988, said that Fr Murphy was anxious to keep the meetings secret and listed the three opponents as "the NIO, the RUC and the DUP".
"Fr Murphy was frankly surprised at the speed with which events had moved and was particularly surprised at the signs of apparent flexibility being shown by the UVF in this exercise where they demonstrated a willingness to at least talk about a wide range of possible future arrangements for Ireland, not excluding concepts like a federal Ireland," Brendan Mahon, of the Anglo Irish Division wrote.
Mr Mahon said Fr Murphy's understanding of the concept of a federal Ireland was "based on the four provinces including a nine-county Ulster with a separate province-type arrangement for Dublin similar to the District of Columbia in the US".
Federalism is a process by which a central and regional government share power over the same geographical area, indicating Dublin would have a say in a Stormont government. It is not specified if the UK would still have a role in NI.
"John Murphy has informed me on a highly confidential basis that these talks have now moved outside of the confines of the prison and that the army council of the IRA and the leadership of UVF have now agreed to separate talks with the chaplains outside of the prison," Mr Mahon wrote. The papers state that neither the UDA nor the INLA were involved in the talks, which were indicated to have started in the summer of 1988.
The UVF indicated to exclude the UDA due to confusion within the organisation and "fears regarding the level of security force penetration of the UDA".
However, it was indicated that former Unionist leader James Molyneux knew about the talks and Fr Murphy "did not expect any trouble" from him.
Fr Murphy also claimed that the flexibility being shown by the UVF was "indicative of the general uncertainty among loyalists as regards their future in a changed Anglo/Irish relationship".
The religious hierarchy were also kept in the dark. The memo reads that the bishops were not aware the talks had moved outside the prison, and that knowledge was confined to "the leadership of the IRA and UVF, two chaplains and now, ourselves".
The support of the bishops was apparently being held off until their backing was needed "to forestall any attempt by other political interests to derail the initiatives".
Fr Murphy was said to seem "optimistic" about the prospects.
"It is nonetheless an extremely interesting development entailing, as it does the military leadership of the IRA (as distinct from Adams etc) in talks with the most hardline loyalist paramilitary organisation."