Two more soldiers have been arrested over a video of British troops appearing to abuse Iraqi civilians, the Ministry of Defence has confirmed.
The images have been broadcast in the Middle East
Military police are still questioning Cpl Martin Webster of 1st Battalion The Light Infantry, held after the News of the World showed images from the video.
The ministry said the three "might be implicated" in the abuse allegations.
The provincial council in Basra, southern Iraq, has suspended relations with British forces over the video.
The News of the World said the pictures came from a video shot in southern Iraq in 2004.
The MoD said in a statement that the Royal Military Police had identified "several people" in the video.
The statement read: "The investigation is still in its early stages but significant progress has been made.
"Three individuals have been arrested who might be implicated in the allegations although it would be inappropriate to comment further."
Capt James St John-Price in Basra confirmed that the provincial council had severed contact on Monday.
The council was expected to send out letters on Tuesday to the police service and other subordinate organisations calling for a policy of non-cooperation with British troops.
"We are hopeful that the Iraqi Police Service will keep carrying out joint patrols [with British forces]," Capt St John-Price said.
Meanwhile, two Iraqi civilians who claim they were beaten by UK soldiers in 2004 said they intend to take legal action against the British military for compensation.
Bassem Shaker, 27, and a 14-year-old say they were among nine people beaten after a demonstration in Amarah, south-east Iraq.
The BBC's Jonathan Charles said it was not clear if the pair were among those seen in the video obtained by the Sunday paper.