The Iraqi Trade Minister threatened today to impose a national boycott on Australian wheat and other exports after Australian soldiers mistakenly shot dead one of his bodyguards.

The shooting happened after an Australian protection unit accompanied a visiting dignitary to the offices of the minister, Abdul Falah al-Sudany, in Baghdad yesterday.

The Australian convoy left the ministry followed by a vehicle carrying Iraqi bodyguards, which then tried to overtake.

Police and Interior Ministry sources said it appeared that the Australians mistook the bodyguards, who were dressed in civilian clothes and armed with AK-47 rifles, for insurgents and opened fire, killing one man and wounding three others.

"The minister holds the Australian Government responsible and demands an apology and payment of compensation. If this does not happen he will reconsider trade agreements between the two countries," Muhammed Hanoun, a Trade Ministry spokesman, told Reuters.

The incident will come as a major embarrassment for Canberra, which has been trying hard to improve trade ties with Iraq after Baghdad suspended dealings with Australia's monopoly wheat exporter, AWB Ltd, over a scandal involving £90 million in kickbacks paid to the Saddam regime in the years leading up to the war.

Iraq has long been one of the largest customers for Australian wheat, taking around 10 per cent of its crop, and the suspension of the dealing with AWB have forced Australian growers to create a new consortium to deal with Baghdad.

Lieutenant General Ken Gillespie, vice-chief of the Australian Defence Force (ADF), said: "The ADF deeply regrets the injuries and loss of life that has occurred. As with all ADF incidents of this nature the matter will be formally and fully investigated."

The incident came after John Howard, the Australian Prime Minister and a close ally of President Bush, announced that 460 troops guarding a Japanese humanitarian team would be re-deployed for an even riskier mission, not brought home, when the Japanese withdraw.

"To leave Iraq prematurely would not only destabilise the Middle East, it would also provide comfort and strength to extremists all around the world," Mr Howard said.

But Kim Beazley, the Opposition leader, said the shooting mishap just showed that Australia should not have got involved in the Iraq conflict.

"I'm afraid in a difficult, complex, civil conflict like that the possibility of what they describe as blue-on-blue, or friendly fire deaths, is always a possibility and it has the most terrible effects, " Mr Beazley said.

"The point is this – we shouldn't be there. We made a mistake going to Iraq in the first place. We should not be there now."

Separately, the US military reported the deaths of four Marines and a soldier - four of them in a roadside bombings - during operations south of Baghdad and in the volatile Anbar province in the past two days.

The military statement said three Marines assigned to Regimental Combat Team 5 "died after their vehicle hit an improvised explosive device". The fourth Marine, assigned to 1st Marine Expeditionary Force, "died after being attacked while conducting security operations". The soldier died in a roadside bombing south of Baghdad.

More than 2,500 US service personnel have been killed since the beginning of the Iraq war in March 2003.

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