Pakistani authorities have arrested a US government security contractor amid a worsening spy agency row between the countries, with Pakistani intelligence calling on the Americans to "come clean" about its network of covert operatives in the country.

The arrest came at the start of the murder trial of another American held in Pakistan, the CIA agent Raymond Davis.

Peshawar police arrested Aaron DeHaven, a contractor who recently worked for the US embassy in Islamabad, saying that his visa had expired.

Little was known about DeHaven except that his firm, which also has offices in Afghanistan and Dubai, is staffed by retired US military and defence personnel who boast of direct experience in the "global war on terror".

It was unclear whether his arrest was linked to escalating tensions between the Inter-Services Intelligence and the CIA, triggered by the trial of Davis, who appeared in handcuffs at a brief court hearing in a Lahore jail.

The 36-year-old former special forces soldier, whose status as a spy was revealed by the Guardian, refused to sign a chargesheet presented to him by the prosecution, which says he murdered two men at a traffic junction on January 27.

Davis instead repeated his claim of diplomatic immunity – a claim supported by President Barack Obama, who called him "our diplomat".

The press and public were excluded from the hearing in Kot Lakhpat jail, where Pakistani officials have taken unusual measures to ensure Davis's security amid a public clamour for his execution.

The furore has also triggered the most serious crisis between the ISI and the CIA since the 9/11 attacks. A senior ISI official told the Guardian that the CIA must "ensure there are no more Raymond Davises or his ilk" if it is to repair the tattered relationship of trust.

"They need to come clean, tell us who they are and what they are doing. They need to stop doing things behind our back," he said. There are "two or three score" covert US operatives roaming Pakistan, "if not more", he said.

CIA spokesman George Little said that agency ties to the ISI "have been strong over the years, and when there are issues to sort out, we work through them. That's the sign of a healthy partnership".

Pakistani civilian officials warned that the ISI was amplifying fallout from the Davis crisis through selective media leaks to win concessions from the US.

"They're playing the media; in private they're much more deferential to the Americans," said a senior government official, who added that the two agencies had weathered previous disagreements in private.

The crisis has sucked in the military top brass from both countries. On Tuesday, a Pakistani delegation led by General Ashfaq Kayani met US generals, led by Admiral Mike Mullen, at a luxury resort in Oman to hammer out the issues.

The US stressed that it "did not want the US-Pakistan relationship to go into a freefall under media and domestic pressures", according to an account of the meeting obtained by Foreign Policy magazine.

The ISI official agreed that future co-operation was vital. "They need us; we need them," he said. "But we need to move forward in the right direction, based on equality and respect."

The media furore over Davis has fuelled scrutiny of other American security officials in Pakistan and their visa arrangements, and may have led police to Aaron DeHaven in Peshawar on Friday.

DeHaven runs a company named Catalyst Services which, according to its website, is staffed by retired military and defence department personnel who have "played some role in major world events" including the collapse of the Soviet Union, the military mission to Somalia and the "global war on terror". Services offered include "full-service secure residences", protective surveillance and armed security.

One prospective customer who met DeHaven last year described him as a small, slightly-built man, who wore glasses and had broad knowledge of Pakistani politics. DeHaven said he had lived in Kandahar, Afghanistan, for one year, had married a Pakistani woman along the border with Afghanistan, and spoke Pashto fluently.

He said he moved his base from Peshawar to Islamabad last year over suspicions that he worked for Blackwater, the controversial US military contracting firm.

His business partner is listed on company documents as Hunter Obrikat with an address in Charlotte, North Carolina. The Guardian was unable to contact either men at listed numbers in Pakistan, Afghanistan, the US and Dubai.

US embassy spokeswoman Courtney Beale said DeHaven was "not a direct employee of the US government" but added that details could not be confirmed until a consular officer had met him. The arrest is another sign of brittle relations between the two countries.

US officials in Washington argue that Davis is a registered diplomat who should be immediately released under the provisions of the Vienna convention. But that plea has fallen on deaf ears in Pakistan, where the papers have been filled with lurid accounts of the spy's alleged activities, including unlikely accounts of him working with the Taliban and al-Qaida.

The US has also struck some blows in the covert public relations war. After a lull of three weeks, the CIA restarted its drone campaign in the tribal belt last Monday, with near-daily attacks on militant targets since then. "It's their way of showing who's in charge," said a senior Pakistani official.

And at the Oman meeting, Mullen warned Kayani he would apply "other levers" to the Pakistanis if a solution to the case was not found, the official added.

Since Davis's CIA status was revealed, US officials have told Pakistani officials that their best hope is in offering compensation to the families of the two men Davis shot in Lahore. Religious parties, however, have pressured relatives not to accept money.

Meanwhile, the Zardari government says it will settle the issue of Davis's diplomatic status at a court hearing scheduled for 14 March.