The pair were partially identified as Thomas Philip C, 32, born in Dublin, and Aaron William J, 42, born in Lisburn, Co Antrim. It is customary in Spain for newly arrested suspects not to have their surnames revealed. In an Interior Ministry statement the men were accused of raising funds for their organisation by running contraband cigarettes.

They had been under investigation in Spain since 2004. Two lorries transporting 500,000 packs of cigarettes, worth more than €1 million (£685,000) were seized along with documents and €2,900 in a raid that led to the pair’s arrest, the ministry said.

Just before their arrest, the two men had received a delivery of cigarettes that was to be sent for sale in Britain.

The ministry said that “contraband tobacco is considered the main source of funding for the Northern Ireland terrorist organisations”.

Spanish police, meanwhile, quoted their British counterparts as saying that the infrastructure used by the Real IRA for smuggling contraband cigarettes was also used for procuring weapons and explosives.

The two suspects have been transferred from Málaga to Madrid. They had been living separately in San Pedro de Alcántara and Benalmádena, towns with large expatriate populations.

According to Spanish media reports yesterday, the men were part of a complex investigation into arms trafficking and financing of Irish terrorist groups.

The inquiry discovered “various British citizens of Northern Irish origin living along the Mediterranean coast who collaborated directly with these armed groups”. Spanish police did not reveal the name of the port into which the suspect load of cigarettes had arrived but said that it had then been stored in a secure warehouse in Guadalhorce, an industrial estate in the city of Málaga.

Police moved in to seize the tobacco as it left the warehouse in two lorries. The contraband had been hidden among furniture. A large quantity of documents was also found.

The Real IRA is a splinter group of the Provisional IRA. In 1998 it murdered 29 people, including a woman who was eight months pregnant with twins, in the Co Tyrone town of Omagh. This led to the Real IRA being forced to declare a ceasefire. However, it has refused to stand down and it and another splinter group, the Continuity IRA, continue to threaten violence, recruit members and raise funds illegally.

Mickey McKevitt, the Real IRA’s founding leader, was sentenced in the Irish Republic to 20 years’ imprisonment in 2003 for directing terrorism.

Smuggling contraband tobacco is one of the favoured fundraising methods of all of Northern Ireland’s terrorism groups. It emerged this weekend that the Republic’s Criminal Assets Bureau has issued High Court proceedings to recover £3.6million from Thomas “Slab” Murphy, the Provisional IRA’s former chief of staff. Mr Murphy’s farm complex, which straddles the Irish border, was raided in March in a joint British-Irish security operation. Officers found cash and cheques in plastic bags valued at hundreds of thousands of pounds, as well as 12 vehicles, 30,000 cigarettes and a large quantity of fuel.

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