AN AUSTRALIAN diplomat knew that Melbourne man Ben Zygier was being held in an Israeli prison before he died in his cell, the government has admitted, amid explosive reports that Mr Zygier was a Mossad agent known as ''Prisoner X''.
Fairfax Media can also reveal that Mr Zygier was one of at least three dual Australian-Israeli citizens being investigated in early 2010 by ASIO over suspicions they were spying for Israel.
Foreign Minister Bob Carr was forced into an embarrassing backflip on Wednesday as he ordered his department to investigate the Zygier case.
His office was forced to correct earlier claims that the Australian embassy in Tel Aviv knew nothing of the case until after Mr Zygier died in prison in December 2010 when his family - a prominent Jewish family in Melbourne - asked for his body to be repatriated.
In a revelation that raises questions about the extent of the Australian government's knowledge, Senator Carr's spokesman said an Australian diplomat - who was not the ambassador - was aware that Mr Zygier, 34, was being held by Israeli authorities.
The revelation follows a report by the ABC's Foreign Correspondent that said Mr Zygier was the notorious ''Prisoner X'', an inmate held in the utmost secrecy in a special section of Israel's maximum security Ayalon prison.
The report stated that Mr Zygier, a husband and father of two, moved to Israel around 2000 and became a Mossad spy. But the report said something went tragically wrong with his intelligence activities and he eventually committed suicide in a tightly guarded cell, where he was being held in solitary confinement.
His father, Geoffrey Zygier, executive director for B'nai B'rith Anti-Defamation Commission, did not comment on Wednesday.
The government acknowledges Mr Zygier died in jail but Senator Carr's spokesman could not confirm that it was Ayalon prison. The Foreign Affairs Department refused to say who the official was or when they knew of the case, saying only that the department would hold an ''internal review'' of its handling of the case.
As Fairfax Media reported in 2010, ASIO was investigating at least three dual citizens for their links to Mossad. Mr Zygier was one of them. It is believed Mr Zygier changed his name to Ben Allen and obtained an Australian passport in that name that allowed him to travel to countries such as Iran and Syria that normally bar entry to Israelis.
The issue has sparked a political storm in Israel, where opposition politicians demanded that Prime Minister Benjamin Netanyahu lift a veil of secrecy surrounding Mr Zygier's imprisonment and death and brief the Knesset foreign affairs and defence committee on the matter.
Outgoing Justice Minister Yaakov Neema vowed that ''if true, the matter must be looked into''.
A spokeswoman for the Israeli embassy refused to comment. But Coalition foreign affairs spokeswoman Julie Bishop, who by chance met with the Israeli ambassador on Wednesday, said she had expressed her concerns about the case and ''he has undertaken to communicate my concerns back to the appropriate officials in Israel''.
Warren Reed, a former officer with Australia's external intelligence agency ASIS, said it was implausible that an ambassador would not be told of an Australian national being held in prison.