Ben Zygier, Melbourne man known as Prisoner X, also questioned by reporter over spying before death in 2010

Extraordinary new details emerged on Wednesday about the alleged double life of Ben Zygier – known as "Prisoner X" – an Australian-Israeli national and reported Mossad agent, who died after being secretly detained in an Israeli prison in 2010.

In the midst of an escalating diplomatic storm over the 34-year-old's treatment and the revelation that he was being investigated by Australian authorities as a suspected Israeli agent who used Australian passports for operations, it emerged that he was confronted shortly before his arrest by an Australian journalist who accused him of being a spy.

As the scandal over Zygier's suicide, while being held incommunicado in Ayalon prison, continued to grow in Israel and Australia, it was also revealed by Australian news organisations that he was under investigation by the Australian Security Intelligence Organisation [ASIO] as one of three citizens suspected of using of Australian passports on behalf of Mossad.

More details of the case emerged as the Israeli government partially lifted its blanket ban on reporting any details of Zygier's imprisonment, first imposed by an Israeli court after his arrest.

Zygier, who was married to an Israeli and had two young children, was found hanged in his cell in late 2010. His body was flown to Melbourne for burial the following week.

In Israel the case has triggered demands by opposition politicians, human rights groups and the media for Benjamin Netanyahu's government to supply more information about the man's imprisonment and death, and to reform its antiquated and authoritarian military censorship rules.

When the story about Prisoner X first emerged, Israeli media said the unidentified man was being held incommunicado at Ayalon high-security prison in the wing built to accommodate Yigal Amir, the assassin of the Israeli prime minister Yitzhak Rabin.

While the case remains deeply murky, the new revelations will be deeply embarrassing to Mossad, not least because they have lifted the lid again on how the Israeli spy agencies acquire cover identities for agents.

In the last three years the Mossad department charged with providing cover identities has been caught out in a series of high-profile bungles as it has been found to have been improperly using foreign passports for its operations.

The details came only a day after an ABC documentary revealed Prisoner X's identity for the first time, and after ham-fisted efforts by Netanyahu's office to prevent reporting of the story by Israeli media messily backfired.

According to The Age, Zygier had applied for Australian passports using three identities over the years – those of Ben Alon, Ben Allen and Benjamin Burrows.

The new details about Australian suspicions that Zygier was a Mossad agent came as the Australian government was forced to backtrack on claims that it had no knowledge of his arrest and to admit that Israeli officials had briefed Australian diplomats over the case.

There has still been no official explanation for why Zygier was secretly imprisoned without trial, and information on his case ruthlessly suppressed. But speculation is growing that he may have offered to provide information to a foreign power.

It is still not clear whether Zygier was actively working for Mossad, or whether he simply acquired passports for the spy agency to use in its overseas operations.

According to The Age, Zygier had been approached by a Fairfax journalist after being tipped off that the Australian intelligence agency ASIO was investigating three dual national citizens who had emigrated to Israel, on suspicion that the men had used Australian passports to spy for Israel in Iran, Syria and Lebanon – which is illegal under Australian law.

Zygier, known as Benji, was approached by the reporter Jason Koutsoukis shortly before his arrest in 2010 and asked whether he was an Israeli spy after being accused of travelling back to Australia to change his name and obtain a new Australian passport.

At the time Zygier said: "I have never been to any of those countries that you say I have been to, I am not involved in any kind of spying. That is ridiculous."

In recent years the issue of both Mossad operations involving citizens of friendly nations and use of passports of allies, has become a source of serious friction with governments usually friendly with Israel.

"There are informal rules," said one person familiar with intelligence co-operation arrangements. "You inform your allies if you want to speak to someone or do something. There is a feeling the Israelis don't play by the rules."

Mossad's use of foreign passports became an international scandal not long before Zygier's secret arrest and detention when it was revealed that the spy agency had used almost a dozen foreign passports in its assassination of Hamas's Mahmoud al-Mabhouh, in a Dubai hotel, in January 2010.

In seven cases it turned out that the passports used were in the name of Jews who had immigrated to Israel from Britain and Germany and had no knowledge that someone using their identity had visited Dubai.

At around the same time it emerged that the Australian intelligence service was investigating the use of identities of at least three Australians.

In a further development deeply embarrassing for the Canberra government the Australia foreign minister, Bob Carr, was forced to revise his claims that the Australian embassy in Tel Aviv knew nothing of the case until after Zygier died in prison in December 2010 when his family, a prominent Jewish family in Melbourne, asked for his body to be repatriated.

Carr's office now admits that an Australian diplomat (who was not the ambassador) was aware that Zygier was being held.

The case, however, remained encircled in a host of unanswered questions, as Zygier's family and friends in Australia remained tight-lipped about the circumstances of his death, refusing to discuss the case with the media.