A Basra judge has issued an arrest warrant for two British soldiers after an Iraqi civilian was reportedly killed and a police officer injured.
The two servicemen - believed to be undercover SAS officers - were detained after a confrontation on Monday.
UK troops later freed the soldiers from Iraqi custody after storming a police station in the southern Iraqi city.
A UK forces spokesman said the warrant had no legal basis but that they would co-operate with the Iraqi inquiry.
Soldiers' 'immunity'
The MoD said it was aware of reports about the arrest warrant but that it could not confirm it had actually been issued.
The two soldiers who were held in Iraq
How Basra drama unfolded
Timeline: UK troops in Iraq
British forces spokesman Major Steve Melbourne said the two men had immunity from prosecution under an arrangement between the Iraqi government and coalition forces.
"They have no legal basis for the issue of these warrants," he told BBC News.
"What we will do is we'll continue to work closely with the Iraqis who actually have the investigation team down here in Basra now, and also with the Iraqi government.
"This has started and we'll see what comes from that into the events of Monday night."
However, the judge told the BBC he was not convinced the two men were British and therefore would not be immune from arrest and possible prosecution in Iraq.
BBC correspondent Richard Galpin said that if the men were found guilty they could face life imprisonment.
'No co-operation'
It was widely believed that the soldiers on an intelligence mission in the city when they were challenged by Iraqi police officers, our correspondent said.
Iraqi police and the interior ministry say that the soldiers opened fire when challenged.
News of the warrant follows a week in which authorities in Basra said they would not co-operate with UK troops.
Basra's governor, Mohammed al-Waili, said their would be no co-operation until there was an apology for the raid to free the soldiers.
The UK has defended its action, saying the soldiers were handed to militiamen by rogue elements in the police, but Interior Minister Baqir Solagh Jabr has denied this.
British troops have reduced their presence on the Iraqi city's streets.
On Wednesday, Iraqi Prime Minister Ibrahim Jaafari and UK Defence Secretary John Reid said the unrest had not strained relations between the two countries.
