The sprawling Shia district, in the north-east of the Iraqi capital, is a stronghold of the Mahdi Army militia.

The Iraqi foreign minister, Hoshyar Zebari, today said the Mahdi Army - loosely controlled by the radical cleric Moqtada al-Sadr - could have been behind the abductions of a financial expert and four bodyguards from the finance ministry building near Sadr City.

Iraqi forces have established a special battalion of Iraqi soldiers and police officers to search for the missing men.

Sadr City residents reported that hundreds of US and Iraqi troops had sealed off areas of the neighbourhood overnight, carrying out a series of raids that lasted until dawn.

"We are conducting search operations near the site where the abduction took place," Brigadier General Qassim al-Musawi, an Iraqi army spokesman, said. "Maybe today, or in the coming few days, we will find them [the Britons] with the help of secret intelligence."

Not all today's military activity in Sadr City was linked to the kidnappings, with the US military saying five people had been arrested on suspicion of weapons smuggling.

The kidnappers wore police uniforms, had the appropriate identification papers and drove up to the ministry building in 19 four-wheel drive vehicles of a type used by officers.

Mr Zebari, who described the abduction of the five Britons as sophisticated, acknowledged the possible involvement of corrupt elements of the interior ministry police in the operation.

"It has been a known fact for some time that the interior ministry police, security units and forces are corrupt, are penetrated," he told BBC Radio 4's Today programme. "This issue is a very serious, challenging fact to the government itself.

"The number of people who were involved in the operation, to seal off the building, to set roadblocks and to get into the building with such confidence, must have some connection."

The seized British security guards worked for a private firm, while the financial expert has been advising the Iraqi government. They were abducted just before noon in what appeared to be a carefully planned assault intended to give the impression it was a government-sanctioned operation.

According to one witness's account, a group of gunmen stormed into a hall where a western adviser was giving a lecture, shouting: "Where are the foreigners?"

The gunmen - led by a man in a police major's uniform - then rounded up the five and left.

In London, the cabinet's Cobra crisis committee held an emergency meeting to discuss the situation, and Tony Blair said the government would "do everything we possibly can to help".

Today, the foreign secretary, Margaret Beckett, attending a meeting of the G8 nations in Berlin, said it was "clearly a very distressing time for all concerned", adding: "Foreign Office officials are offering help and assistance to the next of kin.

"It is not sensible at this stage to speculate on what might have happened. We are working closely with the Iraqi authorities to establish the facts, and doing all we can to secure their swift and safe release."

Employees at the finance ministry are likely to be questioned about how the kidnappers were able to enter the building, seize the Britons and leave with no apparent resistance.

Bayan Jabr, the finance minister, is a conservative Shia politician who has been accused by Sunnis of fomenting sectarian violence, but he is a senior member of a Shia group that is a rival to the Mahdi Army.

The missing Britons have not been named for their own safety. The security guards were working for GardaWorld, a Canadian-based firm employing mainly British ex-soldiers.

The finance expert was working for BearingPoint, a US management consultancy based in Virginia, which won a contract to help rebuild the Iraqi financial system in 2003.