Australian Federal Police are investigating the shooting death of a 34-year-old security contractor at the Australian embassy in Baghdad.
In an incident that will raise questions about security measures for diplomats and the Australian-founded private firm that guards embassy workers, the former Australian soldier was shot dead early on Thursday morning. 
A fellow Australian guard, believed to be a former special forces soldier, was taken to a military base at Baghdad Airport for questioning, sources in Iraq said.
Both worked for the Australian-founded Unity Resources Group, a leading security firm in the Middle East that has faced accusations in recent months of corner-cutting, though the Australian government has vigorously denied those reports.
Foreign Affairs Minister Julie Bishop confirmed only basic details of the incident, saying a "tragic incident" had happened and "there is a thorough investigation under way".
"We pass on our deep condolences to his family," she said of the victim.
While refusing to give details, Ms Bishop said "his death is not related to the broader security environment in Baghdad". She said security was being kept at "a high level" at the embassy.
The shooting is believed to have happened at the contractors' accommodation, which is within the broader embassy compound, giving the AFP jurisdiction to investigate.
Sources said alcohol was involved and the guard who had been taken for questioning had been working in Iraq as a contractor since 2005.
It is understood investigators are approaching the incident with an open mind amid uncertainty around the circumstances of the death.
A Baghdad staff member for URG referred Fairfax Media to the head office in Dubai. Managers there did not respond to phone messages or emails.
It is understood the victim was a former infantry soldier in the Australian Defence Force and the man being questioned was a former commando in the ADF.
In   February, Department of Foreign Affairs and Trade secretary Peter Varghese strongly dismissed reports of problems with the contract with URG. He told a Senate hearing that the reports of corner-cutting and a drop in the price paid by the department under the contract had come from "disgruntled former employees" and the claims were "without foundation".
"The department puts the highest priority on the safety and welfare of its employees, and the suggestion that we would run a cut-price security system is, frankly, quite offensive," he said.
"The core question here is: has this contract been managed in a way that doesn't put our staff at any additional risk? And the answer to that is clearly in the affirmative."
Mr Varghese said the department had looked into media reports about the security issues and was satisfied that security at the Baghdad embassy was "operating effectively and that the transition to the new arrangements has not created any additional risk to our staff".
The new contract price for the security had dropped to $51 million over three years - down from the previous contract of $100 million over five years. But this was due to greater competition among security providers in Iraq, he said.