Darren Hoare, an Australian, was one of two killed in the Baghdad shootout

A British guard working for a security company inside Baghdad’s fortified Green Zone was arrested yesterday after two of his colleagues were killed and another wounded in a reported alcohol-fuelled rampage.

Danny Fitzsimons, who fled the scene with a pistol, was held after a shootout and handed to Iraqi police.

A judicial official in Baghdad said that Mr Fitzsimons could face the death penalty. He is the first British national and the first foreign security guard since the 2003 US invasion to face criminal charges in Iraq.

The two dead, also security guards, were named as Paul Mc Guigan, from Britain, and Darren Hoare, an Australian. The men, who all worked for the British company Armor Group, were drinking alcohol together inside the company compound in the Green Zone, the capital’s administrative centre.

"They were all very drunk and started shouting at each other. They had a big argument and suddenly [Mr Fitzsimons] pulled out a gun and shot his two friends," a witness said. "An Iraqi was standing behind him and tried to take away the gun. But he turned around and shot him ... Then he ran away."

Foreign security contractors were immune from Iraqi law until this year when the Iraqi Government demanded changes after alleged unprovoked killings by contractors.

The incident will embarrass the Foreign and Commonwealth Office, which had contract links with Armor Group, and the American administration in Iraq which had given the company a prime location.

It will also lead to renewed calls for tighter regulation of the industry, rocked last week by claims in court that the founder of the US security company Blackwater had encouraged the senseless killing of Iraqis.

Armor Group is one of the several dozen international security companies still operating in Iraq, fulfilling lucrative contracts to protect foreign officials and businessmen as well as a growing number of wealthy Iraqis.

The men, almost all former soldiers, usually work long, non-stop shifts and few get a day off while in the country. They come for the money and rarely leave their compounds. Their free time is mostly spent on the internet, watching videos and drinking alcohol.

It was one such drinking session in the early hours of yesterday that ended in death. Mr Fitzsimons and several of his colleagues were downing vodka in the Armor Group compound near Saddam’s Republican Palace.

At about 4am the men began to argue, a witness told The Times, and Mr Fitzsimons brandished a Beretta pistol. His colleagues tried to overpower him, but two of them were shot dead.

Mr Fitzsimons then allegedly turned towards an Iraqi colleague, shot him in the leg and ran towards the compound’s main vehicle exit. The Iraqi, though severely wounded, followed him and shouted: "Help. The foreigner has killed other foreigners."

The Iraqi collapsed by the compound exit, outside a white-coloured guard house, breaking a window and leaving a 5ft-long bloodstain still visible on the floor yesterday afternoon. Shouting wildly, Mr Fitzsimons then ran onto a single-lane road bordered by 15ft-high concrete blast walls on both sides, past the former villa of one of Saddam’s wives, Sajdeh, and the residence of Rafi al-Isawi, the Iraqi Deputy Prime Minister.

At the entrance to the nearby American base, known as Camp Liberty, guards alerted military police to the sound of gunfire. United Nations security personnel were also alerted. As they closed in they exchanged fire with Mr Fitzsimons and eventually overpowered him. According to Iraqi sources, Mr Fitzsimons was persuaded to drop his weapon and surrender.

Along with the bodies of his two dead colleagues, he was taken to a police station where he is being held in a small concrete cell with air-conditioning and a single window covered in black wire mesh. A guard outside said: "He gets his human rights."

Consular officials from the British Embassy have visited Mr Fitzsimons, as well as a second British national, believed to be another Armor Group employee, who was being held there but was not considered a suspect and has been released.

Iraqi officials yesterday claimed sole responsibility for prosecuting Mr Fitzsimons, having taken over full control of the Green Zone from the Americans in early July. A judicial official said: "The possible punishment for a crime like murder is execution."

Mr Fitzsimons arrived in Baghdad a few days ago, but has worked as a security guard in Iraq periodically for the past five years. He is said to have "military operational experience" and worked for Armor Group as well as other private security companies. Most recently he took a one-year vacation. British guards with a military background can earn up to £80,000 a year in Iraq.

Mr Fitzsimons posted details about his military past on a Facebook page set up to honour fallen service personnel. He tells of his time in 2 Para and his 3½ years in private security work. He advises soldiers in Iraq and Afghanistan: "Stay safe and to those who will return to fight a different battle ... A war inside your head."