The Australian Securities and Investment Commission (ASIC) is looking into failed insurer HIH's UK operations, as part of a wide-reaching investigation.

The team has already seized documents in raids on HIH's Sydney offices and is planning to broaden its probe to include the UK and US. It is looking into the possibility of criminal or civil breaches of the corporation law.

Australia's Prime Minister John Howard said the government would provide whatever funds were needed for the probe. “We believe the book should be thrown at any who have been guilty of a breach of the law,” he said last week.

He added that the government would prefer to fund a bail-out of HIH policyholders, rather than impose a levy on other insurance policyholders.

The Australian government has set up HIH Claims Support and has agreed to give AUS$500m (£184m) to HIH's hardest hit customers.

Some 28,000 policyholders were left stranded without cover after HIH, one of the country's largest insurers, went into liquidation with liabilities of more than AUS$1.6bn (£582m).

The government is now in talks with other insurers to take over responsibility for paying claims. Politicians fear the bankruptcy could threaten the Australian economy and consumer confidence in the insurance industry.

Australian treasurer Paul Costello said: “This is a corporate failure that has affected a lot of people and it won't be good for their confidence.

“That will have an effect on the economy. I hope that fall-out can be minimised.”

Analysts are blaming the collapse largely on losses from overseas operations, although some believe that HIH had not recovered after spending AUS$300m (£110m) to buy FAI Insurance in 1999. Shares in HIH were last traded in February but have since been suspended.

This week another Australian insurer hit trouble. NRMA Insurance, Australia's big-gest general insurance company, was out on negative credit watch after boardroom turmoil saw it lose its chairman and chief executive.