* Australia says no evidence of passport misuse by reputed Mossad spy
* Joint citizen not linked to Hamas assassination
* Australia warns Israel not to misuse passports (Adds former PM Rudd, Israeli comments)
SYDNEY, March 6 (Reuters) - Australia had no evidence that an emigrant to Israel who died in an Israeli jail in 2010, had been involved in the assassination of a Hamas arms procurer in Dubai, Foreign Minister Bob Carr said on Wednesday.
Carr said Ben Zygier had worked for the Israeli government when he was arrested, but stopped short of confirming he worked for the Mossad security service. He also said there was no evidence of misuse of any of the Australian passports taken out by Zygier, legally issued to him under new names.
However, Carr said the case raised unresolved questions about Australian passports held by dual citizens who work for a foreign government, and said Australia would lodge the strongest possible protest if it was found that Israel had used an Australian passport for spying.
"We have our own sources. None of them have information at this time that one of his passports was misused. But we are very alive to the possibility," Carr said as he released a Department of Foreign Affairs and Trade report into the case.
"Certainly we would regard it as intolerable that any government would make use of Australian passports for intelligence-gathering purposes."
Zygier was arrested in February 2010 and charged with security offences that have not been made public. At around the same time, Australia had complained to the Israelis after its passports had been used in a mission to kill a Hamas arms dealer in Dubai, which the Gulf emirate blamed on Mossad.
On Feb. 19 this year, Israel confirmed for the first time the affair concerned Zygier, who had earlier been named in an Australian Broadcasting Corporation television report.
One of Zygier's lawyers later linked him to Mossad, the Israeli spy agency. An expose aired by Israel's Channel Two television on Monday said that a senior Mossad official attended Zygier's funeral in his hometown of Melbourne. Many other details of the case remain the subject of gag orders in Israel.
A judicial inquiry in Israel found Zygier, 34, hanged himself in December 2010 with a sheet tied to the bars over a window in the bathroom of the heavily guarded cell where had been kept under alias and secluded from other prisoners.
Carr ordered an investigation into the case last month, saying he would ask Israel's government to explain how Zygier, a father of two who had lived in Israel for 10 years, managed to kill himself while tightly supervised. His death fuelled conspiracy theories in both countries. Israel says it is investigating possible negligence by prison guards.
Carr said Israel had not responded to requests for information, nor explained the lack of a response. Australian officials and intelligence agencies still did not know why Zygier was jailed and what charges he faced, except that the charges carried a maximum penalty of up to 20 years in prison.
"SECURITY AFFAIR OF THE UTMOST GRAVITY"
Israel has said Zygier consented to his secret detention, to stem what it deemed as dangers to national interests from his exposure. That assertion has not been contested by his lawyers.
"This was a security affair of the utmost gravity. The damage to national security that was liable to have been caused, and apparently was caused, was most grave," Israeli prosecutor Raz Nizri told Israel's Channel One television on Tuesday.
Carr's inquiry found shortcomings in the handling of the case by Australian authorities, but noted that Zygier had received 50 visits from his family and lawyer between the time of his arrest and death.
Carr had initially said the Australian government had not been informed of Zygier's incarceration. He later acknowledged Australia's chief intelligence agency had been informed about the issue as early as February 2010.
Australia's former prime minister Kevin Rudd, prime minister at the time of Zygier's arrest, on Wednesday said he was not informed of the arrest by his own intelligence agencies.
Rudd also said he was not told of Zygier's detention ahead of his visit to Israel as foreign minister from Dec. 12 to Dec. 14, 2010, when he met both Israel's prime minister and foreign minister. Zygier died in custody on Dec. 15. (Additional reporting by Dan Williams in Jerusalem; Writing by James Grubel, Editing by Ron Popeski)