So what were two undercover British soldiers up to in Basra?

The dramatic rescue of two special forces men from an Iraqi police station has exposed hidden tensions and highlighted increasing dangers for British troops. Raymond Whitaker in London and Sarah Tejal Dave in Basra report

An Iraqi judge yesterday issued arrest warrants for two British soldiers, presumed to be SAS men, whose detention by Iraqi police and subsequent rescue by British forces in Basra last week has thrown an unprecedented spotlight on Britain's role in Iraq.

Early yesterday a flurry of rockets was fired at buildings occupied by British troops, but police said the only injuries were suffered by an Iraqi family in a house hit by one missile. Tensions aroused by last week's clashes remain high, with Basra's governor refusing to co-operate with British forces until the local authorities receive an apology and compensation for the damage caused when troops stormed the al-Jamiat police station on Monday.

The arrest warrants issued by Judge Raghib al-Mudhafar, chief of the Basra anti-terrorism court, have "no legal basis", according to British spokesmen, because of the agreement giving British forces legal immunity. "We have a legal obligation to investigate the allega- tions ourselves," said a Ministry of Defence official. "That is being done as we speak. We will continue to work with the Iraqis on the inquiry which the Iraqi government has begun."

But Judge Mudhafar says he is not convinced the two men are British - possibly because one of them was said to have been carrying a Canadian-made weapon - and they may not be entitled to immunity. This has added yet another layer of mystery to what is already an extremely murky affair.

Who are the two men, and what were they doing when they were seized outside Jamiat police station? What prompted British forces to smash down the wall of the station and demolish several prefabricated buildings inside the compound in the operation to snatch them back? Is it true that they had been handed over to a militia, or that the men inside the station were militia in police uniform?

The search for answers to those questions reveals that the picture the British public has been allowed to gain of our occupation of southern Iraq - one of relative tranquillity and co-operation compared to the bloody mayhem further north - is at best misleading, at worst deliberately distorted.

At the request of the MoD, British media obscured the faces of the two captured men. The two sides give wildly differing accounts of events, but it is not disputed that they had been sitting in a car outside the police station in Arabic dress. They were heavily armed and had an impressive array of surveillance equipment with them. It is not impossible that one or both of the men are not British. Special forces from Australia and New Zealand, for example, often work closely with the SAS. They could even be "civilian contractors" of the kind hired by the CIA, usually ex-special forces. But it is their mission that is more significant.

Subversion from nearby Iran has been blamed for a recent increase in attacks on British forces in southern Iraq, including the use of more sophisticated and deadly roadside bombs, which have claim- ed the lives of three soldiers. Initial assumptions that the undercover pair were working to combat such influence have been contradicted by military and other sources, however. Not only are they sceptical about the Iranian connection, pointing out that there is more than enough explosive and bomb-making expertise available in Iraq, but they say the surveillance operation was the result of a problem largely of Britain's own making.

The occupation authorities have turned a blind eye while Shia militias - including one loyal to the Prime Minister, Ibrahim al-Jafaari, who appeared in London last week with the Defence Secretary, John Reid, to condemn the violence - have infiltrated the police in southern Iraq. Another group supports the maverick Shia cleric, Moqtada al-Sadr; it is hardly surprising that Basra's police chief admitted last week that he could count on the loyalty of only a quarter of his men.

Corruption among the poorly trained and ill-disciplined police is another concern. "They sell their uni- forms to insurgents for $25 while also taking the wage as a police officer supporting the multinational force," said one British squaddie. "So why do we bother?"

It is the adherents of Ahmed al-Fartusi, who broke away from Mr Sadr's Mahdi Army, who are the greatest danger. According to sources in Basra, they had turned the Jamiat police station in south-western Basra into a hotbed for smuggling, political assassination and organised crime, and trouble was already feared when Mr Fartusi and another suspect were arrested last Sunday. The seizure of the surveillance team outside the station lit the touchpaper. British forces surround- ed the compound, and were attacked by crowds of Iraqis.

Initial attempts by British military spokesmen to minimise what happened merely heightened confusion and suspicion. Claims that the crowd was small and the violence minor were quickly belied by photographs of a soldier leaping from the turret of his Warrior armoured vehicle, his uniform burning from a petrol bomb. British troops were said to have emerged largely unscathed, only for it to emerge later that one was flown home in a serious condition.

Not only did it appear that lethal force had to be used to suppress the riot, causing an unknown number of Iraqi deaths, it was also claimed that the two undercover men had opened fire when they were stopped at a police roadblock, killing at least one policeman. There were also sharply conflicting accounts of why troops crashed into the station: to determine where the pair were, according to one version, or to rescue a negotiating team, according to another. The surveillance team had been handed over to militants and were found at a house in the district, the military said, but Iraqis denied this, saying the building was within the compound.

Whichever details are correct, the result has been a rupture in whatever trust existed between the civil authorities and the military occupiers in Basra. British troops kept out of the centre of the city in the wake of the violence. "As the threat increases ... we don't take as many risks," said one private. "We keep things to a minimum."

The affair has crystallised long-held suspicions that Britain has largely "kept the lid" on southern Iraq by avoiding American-style confrontation, at the price of allowing increasingly sinister forces to gain a foothold. These forces are still a long way from having control, but Britain's problem is that it has responsibility for the region without having real power. As one soldier put it: "There are heightened tensions because of the constitution and perceived lack of progress - various factions have been complaining about that. At the end of the day we are at the end of the line: blame the security forces."

Conspiracy theories, always rife in Iraq, have been fuelled dramatically by last week's events, according to Mazin Younis of the Iraqi League, an alliance of Iraqi exiles based in Britain. He has close contacts with Basra. "Everyone you talk to [thinks the two undercover men] were up to something very bad... to kill somebody or destroy a building, and let us battle against each other," he said.

"Being in civilian clothing, wearing Arab clothes, made them look like spies. In Iraq, when you mention the word spy, people really get agitated. Even under Saddam Hussein, people were patriotic, they didn't like foreign spies in their country. So this image is very much of clandestine and secretive action."

The troops are reaping the results of errors made in the aftermath of the war - errors which were entirely foreseeable, according to Sir Hilary Synott, who administered southern Iraq in the early months of the occupation. "I wasn't all that surprised to see what happened," he said. "We needed a very large number of foreign police to train a police force which under Saddam was reduced to traffic duties and extortion - it was a massive task to rebuild a corrupt and hated police force into one devoted to the people.

"But we were never given sufficient resources, and they came too late. There was totally insufficient preparation for the post-conflict situation, and all the attention was on reconstructing the Iraqi military."

Troops on the ground fear that the situation can only deteriorate as Iraq prepares for a referendum in three weeks' time on the constitution. Almost simultaneously, Saddam is due to go on trial. "The forecast is things could build up," said one soldier, who talked of a "desert Bosnia". He added: "The problem we have is we can't shut ourselves away and not go out - there's always a degree of risk when we go out the door."