Two British soldiers have been arrested in the southern Iraq city of Basra, sparking clashes outside a police station where they are being held.

The men, said to have been under cover, reportedly exchanged fire with police after failing to stop at a checkpoint.

Two British tanks, sent to the police station where the soldiers are being held, were set alight in clashes.

Three UK servicemen were injured during the day, but the MoD would not say if they were caught in the firebombing.

Civilians 'killed'

TV pictures show soldiers in combat gear, jumping from one of the flaming tanks and making their escape.

Local council spokesman Nadhim al Jabari said two civilians were killed in the clashes.

Up to 15 civilians were also reported injured in the demonstrations.

Tensions have been running high in the city since the arrest of a senior figure in the Shia Mehdi Army by UK troops.

In other developments:

• Nine Iraqi police and a civilian have died in suicide bombings between Baghdad and Karbala, where Shias are attending a major religious festival
• The Iraqi government says a nephew of Saddam Hussein, Ayman Sabawi, has been sentenced to life in prison for funding Iraq's insurgency
• An Iraqi reporter working for the New York Times, Fakher Haider, has been found dead in Basra
• Iraq's Finance Minister, Ali Allawi, tells the UK's Independent newspaper that large-scale corruption in Iraq's ministries, particularly the defence ministry, has led to the theft of more than $1bn.

Civilian clothes

But the BBC's Caroline Hawley said a call from the British ambassador for the men to be released had not been acted upon.

It was now a "serious diplomatic incident", she said, with the British authorities trying to secure their freedom.

An Iraqi official in Basra said the British military had informed him the detained men were under cover soldiers.

This has not been confirmed, but pictures of two soldiers being detained in police cells show the men wearing civilian clothes.

The official said: "They were driving a civilian car and were dressed in civilian clothes when a shooting took place between them and Iraqi patrols.

"We are investigating and an Iraqi judge is on the case questioning them."

An MoD spokeswoman in London would only say: "We can confirm that the Iraqi authorities are holding two UK service personnel and we are liaising with the Iraqi authorities on this matter."

But another report said British forces had phoned the ministry in Baghdad to say the two detained soldiers were involved in "an intelligence mission".

BBC world affairs correspondent Richard Galpin said tension had been growing in Basra since the arrest on Sunday of a senior figure in the Shia Mehdi Army militia, suspected by the British military of being behind a series of attacks on troops.

His arrest drew crowds onto the streets of Basra demanding his release.

Richard Galpin said British troops had since carried out further raids and made more arrests, sparking further unrest.

Violence has been increasing in the British-controlled Basra region in recent months, with two soldiers killed by a roadside bomb on 5 September and a third on 11 September.