The misuse of a satellite phone registered with the British Embassy in Baghdad is being investigated by the Foreign Office (FCO).
Allegedly, the phone was stolen two years ago and has run up a bill of Ј500,000.
The phone was barred in June when its operator - Thuraya - picked up abnormal billing information.
A foreign office spokesman said last night: "Following concerns over one of our satellite phones going missing in Baghdad it was debarred from use.
"An investigation into this is taking place. Until that is completed it's not possible to provide any further details".
Newspapers have speculated that the phone was intercepted as it was sent from Britain to Baghdad, via a courier.
There are also fears that the sat-phone fell into the hands of insurgents in Iraq and claims that invoices show thousands of calls made to Yemen and Saudi Arabia, BBC News reports.