The Green Zone is a heavily fortified area in Baghdad
A British man remains in the custody of Iraqi police following the fatal shooting of two contractors in Baghdad's Green Zone.
UK company ArmorGroup Iraq said Briton Paul McGuigan and Australian colleague Darren Hoare were killed on Sunday.
A company spokesman said employee Danny Fitzsimmons, who had recently rejoined the firm, had been arrested.
He is also accused of wounding an Iraqi and is continuing to be questioned by Iraqi authorities.
A second British ArmorGroup employee was also questioned about the shooting but released later by police.
An Iraqi military spokesman said the incident "started as a squabble".
The Green Zone is a heavily protected region of Iraq's capital city.
A Foreign Office spokeswoman said the Iraqi police were investigating.
And Iraqi military spokesman Major General Qassim al-Moussawi said the matter was now in the hands of Iraqi justice.
Mr McGuigan, a former Royal Marine, 37, worked for the company for six years and has family in Peebles in Scotland, the firm's spokesman said.
The ArmorGroup Iraq spokesman said: "I can confirm the deaths of two ArmorGroup Iraq employees in the early hours of this morning in a firearms incident in the International Zone in Baghdad.
"The two men were Paul McGuigan, a British national, and Darren Hoare, an Australian national. Their next of kin have been informed and we are supporting them as much as we can in these tragic circumstances.
"We are working closely with the Iraqi authorities to investigate the circumstances of their deaths."
The ArmorGroup Iraq spokesman described the firm as a "protective security company" that has been operating in Iraq since 2003.
The BBC's Natalia Antelava in Baghdad said "it does seem to have been some sort of personal squabble", adding that the men were colleagues.
She said: "It [the Green Zone] is actually the safest place in Baghdad, it is a place that is very well protected, that us surrounded by checkpoints and big walls.
"It's a place where embassies are, where many international organisations operate from, where most foreigners live."
But she added: "It really does show you this is a high-stress, high-risk environment where violent things happen."
The Green Zone is the fortified area which houses the Iraqi government, coalition headquarters and most embassies.
In January Iraqi forces took over responsibility for the security of the zone which is a powerful symbol of the US-led occupation of Iraq.