A novel that became a worldwide publishing phenomenon more than 60 years after it was first published in Germany was turned down by a British publisher in 1948, according to a rejection letter found in Jerusalem.

Readers had to wait until 2009 for the first English translation of Hans Fallada's Alone in Berlin, a masterpiece about extreme fear under a dictatorship. It came out in Germany in 1947, weeks after the author's death at 53, following a life blighted by mental illness and morphine.

Penguin has sold more than 300,000 paperback copies of the book in 13 months, a sensational figure for foreign literature. In the United States, where it appears under the title Every Man Dies Alone, sales have topped 200,000, while the book has been translated into 20 different languages. A major German feature film is also in the pipeline.

However, Putnam & Company, bought by Penguin in 1996, failed to see its potential, even though it had published Fallada's books in the 1930s.

Writing to a friend of Fallada - real name Rudolf Ditzen - who had submitted a specimen translation, a Putnam publishing director wrote: "I have the distinct impression that our poor author, after all his tribulations, had lost his inspiration. This is not to be wondered at, and it might have come back if he had only lived. Now we must regard this as one more of the countless war tragedies."

The letter, sent to an Austrian Jewish writer called Carl Ehrenstein, has come to light among unpublished papers deposited at the National Library in Jerusalem a few years ago.

The book has since become the No1 bestseller there - selling 100,000 copies.

A newly appointed archivist noticed Fallada's name on an uncatalogued file. Dr Stefan Litt said "it was amazing to see in the light of [Alone in Berlin] becoming a world bestseller".

Professor Haggai Ben-Shammai, the National Library's academic director, suggested that the British public in 1948 might not have been ready for a German novel so soon after the war. "They were probably suspicious of the possibility that there are good Germans [or those] who really suffered," he said.

Alone in Berlin has become Penguin's bestselling classic, beating George Orwell, Jane Austen and Dickens.

Dennis Loy Johnson, the founder of Melville House Publishing, offered another explanation for his rejection in 1948 - that Fallada ended up in East Germany and publishing company owner George Putnam may have assumed he was a Communist.

But he said that Putnam had sent his own yacht in 1938 to urge Fallada to flee Germany. "It feels like a cold betrayal, doesn't it?"