Iraqi authorities are preparing an arrest warrant for the country's former defence minister in connection with a massive fraud case involving the "disappearance" of more than $1bn from ministry coffers.

Judge Raid al-Radhi, who is head of Iraq's commission on public integrity, said yesterday that he had given Iraq's central criminal court a dossier of evidence against Hazim Shaalan, who was minister of defence under the former government of Ayed Allawi.

"What Shaalan and his ministry were responsible for is possibly the largest robbery in the world. Our estimates begin at $1.3bn [£720m] and go up to $2.3bn," Judge Radhi, who is Iraq's senior anti-corruption official, told Reuters.

The "robbery" is believed to include the signing of multimillion-dollar deals with companies to supply equipment that was sometimes inappropriate for the new army or was years out of date. It is also alleged that the ministry paid huge premiums for some military hardware.

Judge Radhi said he expected the court to issue warrants over the next week to 10 days for Mr Shaalan and for other senior defence ministry officials. The judge said he had passed the file of evidence on the case to Iraqi authorities two months ago.

Mr Shaalan, who is understood to be living in Jordan, has denied complicity in the scandal, saying that his actions as defence minister were ultimately the responsibility of the US authorities in Iraq.

News of the warrant came after the Iraqi finance minister, Ali Allawi, claimed in an interview with the Independent newspaper that $1bn had been stolen from the defence ministry.

Mr Allawi said the rampant corruption and fraud at the defence ministry had left the new Iraqi army with second-rate weapons with which to confront the insurgency. "Huge amounts of money have disappeared. In return we got nothing but scraps of metal," Mr Allawi said.

Ayed Allawi's government was in power from the end of June 2004 until late February this year. The new Prime Minister Ibrahim al-Jaafari has repeatedly complained about the legacy of administrative and financial corruption.

Judge Radhi said there was also evidence against the transport, trade, interior, public works and labour ministries, and that up to 50 officials could be brought to justice.

Allegations of corruption at the defence ministry have been swirling around Baghdad for some time, but the scale of the fraud has shocked many. A defence ministry source, who requested anonymity, told The Guardian yesterday that hundreds of millions of dollars had been wasted on unnecessary and overpriced equipment for Iraq's military.

"There appears to be no oversights and accountability in the procurement," he said. Investigators have been investigating weapons and equipment deals struck by the former procurement officer Ziad Cattan and other officials. The source said the most egregious case involved a $236m contract last December to equip the Iraqi army with helicopters and other material.

"The money was paid upfront to a Polish company before we'd even seen what we were buying. It was very fishy," he said. "The helicopters turned out to be years old and not up to the job we required them to do in Iraq." Another contract for US machine guns, at a cost of $3,500 each, bought Egyptian copies worth $200.

Judge Radhi said the ministry is alleged to have illegally signed contracts with intermediaries, rather than with foreign companies and governments, for the supply of defence equipment.

In other developments yesterday, the central Iraqi criminal court announced it had given a life sentence to a nephew of the former dictator Saddam Hussein, who was found guilty of funding the insurgency and bomb-making. Ayman Sabawi, the son of Saddam's half-brother Sabawi Ibrahim al-Hassan, was arrested by Iraqi forces during a raid in May. His father, Al-Hassan, who served as a presidential adviser before the US-led invasion, was captured there two months earlier.

It was the first court decision against a family member of the former Iraqi ruler. The trial of Saddam is due to start on October 19.

Iraqi authorities had not announced that Sabawi's trial was under way but said he would face a second trial at the beginning of November for other, unspecified crimes to which he allegedly confessed during interrogation.

A government statement said the UN had indicated the Sabawi family stole "millions of dollars from the Iraqi people" under his uncle's rule.

Meanwhile, in the relatively calm southern city of Basra, journalist Fakher Haider was found shot dead yesterday morning after being abducted from his house by four masked men claiming to be intelligence officers. Mr Haider worked in Basra as a stringer for the New York Times and occasionally for The Guardian. He was the second journalist to be killed in Basra in recent months. The US journalist Steven Vincent and his Iraqi translator was kidnapped and shot by an unknown gang in early August.