Britain is one of the world's main arms exporters
UK-based arms dealers may have been selling former Soviet weapons from Ukraine to blacklisted countries, a cross-party group of MPs has warned.
The MPs said they were "extremely concerned" the UK government had not been aware of a list of arms dealers licensed by the Ukrainian authorities.
Foreign Secretary David Miliband has ordered an investigation into the alleged transactions.
The MPs are calling for tougher restrictions on arms exports.
The MPs - known as the Committees on Arms Export Controls - describe how they alerted Mr Miliband to a list of UK dealers granted licences to export small arms from the Soviet weapons stockpile.
They say this information was handed to them by Ukraine's deputy foreign minister on a fact-finding trip to Kiev.
"We were alarmed to see that the end users on the list included countries for which there are Foreign and Commonwealth Office restrictions on the export of strategic goods," the MPs write.
BIGGEST ARMS EXPORTERS
1. USA - $12.8bn
2. Russia - $7.4bn
3. France - $6.2bn
4. Israel - $4.4bn
5. UK - $4.1bn
Source: Stockholm International Peace Research Institute.
Figures are for 2007 and exclude China, which does not release data on the value of its arms exports.
The list did not say whether the arms were exported directly from Ukraine to the end users or whether they were shipped via the UK first - and did not indicate the value or type of weapons.
But the MPs said there were ongoing concerns about ex-Soviet weapons "ending up in undesirable locations".
Mr Miliband wrote to the MPs to say HM Revenue and Customs and the Export Control Organisation had launched an investigation but asked them not to publish details of the Ukrainian list "as it would alert the companies to the fact that we are investigating, and might lead those who have committed an offence to try and cover their tracks".
The MPs are calling for British embassies in major arms-exporting countries to obtain better information on Britons involved in the trade.
The report says all UK residents and British citizens overseas should obtain licences before trading any goods featured on the "military list" of weapons and equipment.
Committees chairman, Labour MP Roger Berry, said: "The UK has a responsibility to ensure that its arms export industry, and individual UK citizens working overseas, are not engaging in the illegal arms trade."
The MPs welcomed Mr Miliband's decision earlier this year to revoke export licences to Israel.
The revoked licences are reported to cover spare parts for Israeli boats which allegedly fired missiles and artillery shells into Palestinian territory during the invasion of Gaza last year.
In their report, the MPs said the government must do more to ensure equipment is not being used against civilians in war zones and highlighted concerns arms exported from the UK have been used against civilians in Sri Lanka's civil war.
Britain and other EU countries are reported to have sold arms to the country's government in the final three years of its conflict with the Tamil Tigers.
The MPs say they are concerned weapons and equipment exported to the country during a ceasefire may have been used against civilians when hostilities escalated in 2006.
The MPs say applications for licences for arms exports to Israel and Sri Lanka should continue to be assessed case-by-case.
Britain, which is one of the world's biggest arms exporters, has been involved in efforts to set up a global arms sales treaty and since December has been subject to an EU-wide agreement, although campaigners say it is ineffective as enforcement is down to individual countries.
A Foreign Office spokesman said: "The government shares the committees' concerns regarding military exports fuelling conflict in countries such as Sri Lanka.
"As a result of the intensified fighting in Sri Lanka earlier this year, the government launched a full review of export licensing decisions to Sri Lanka. In particular, whether there was a need to revoke any licences that were now in breach of the criteria governing export controls.
"This review is nearing completion, and the outcome will be reported to Parliament."
He added: "Overall, we are pleased that the committees endorse our policy of case-by-case assessment for assessing export licences."
The Committees on Arms Export Controls is made up of members of four different select committees: business and enterprise, defence, foreign affairs and international development.