US diplomats disparaged New Zealand's reaction to a suspected Israeli spy ring as a "flap" and accused New Zealand's government of grandstanding in order to sell more lamb to Arab countries, according to leaked cables.

The arrest and conviction in 2004 of two Israeli citizens, who were caught using the identity of a cerebral palsy sufferer to apply for a New Zealand passport, caused a serious rift between New Zealand and Israel, with allegations that the two men and others involved were Mossad agents.

"The New Zealand government views the act carried out by the Israeli intelligence agents as not only utterly unacceptable but also a breach of New Zealand sovereignty and international law," New Zealand's then-prime minister, Helen Clark, said after the arrests.

But US officials in Wellington told their colleagues in Washington that New Zealand had "little to lose" from the breakdown in diplomatic relations with Israel and was instead merely trying to bolster its exports to Arab states.

A confidential cable written in July 2004, after New Zealand imposed high-level diplomatic sanctions against Israel, comments: "The GoNZ [government of New Zealand] has little to lose by such stringent action, with limited contact and trade with Israel, and possibly something to gain in the Arab world, as the GoNZ is establishing an embassy in Egypt and actively pursuing trade with Arab states."

A cable two days later was even more pointed, saying: "Its overly strong reaction to Israel over this issue suggests the GNZ sees this flap as an opportunity to bolster its credibility with the Arab community, and by doing so, perhaps, help NZ lamb and other products gain greater access to a larger and more lucrative market."

The two Israelis were sentenced to six months in prison and ordered to pay a fine of $NZ50,000 (£24,000) to the Cerebral Palsy Society of New Zealand because the victim of the attempted identity theft was a tetraplegic, wheelchair-bound cerebral palsy sufferer in residential care.

Both men pleaded guilty but denied working for Mossad. The pair were released after serving just two months behind bars and deported in October 2004. Israel made a formal apology for what an Israeli government statement refered to as "the incident with the Mossad," and normal diplomatic relations were restored by late 2005.

To US diplomats, though, "New Zealand's public reaction is its strongest diplomatic retaliation in 20 years – since French spies bombed the Rainbow Warrior in Auckland harbor in 1985. Clark's limitations on diplomatic contact go further than the GoNZ reaction in 1985, however, and it was reported that she toughened the language of her response from that put forward by MFAT [New Zealand's ministry of foreign affairs and trade]."

Ironically, a 2003 US embassy cable from Wellington alleged that New Zealand agreed to deploy troops to Iraq in order to safeguard lucrative contracts for New Zealand diary exporters, a claim described by Clark – currently the head of the UN Development Programme – as "rubbish".