India is grappling with the possibility that one of its own undercover operatives helped arm the Islamist extremists who attacked Mumbai, killing 171 people.

Police in Indian-controlled Kashmir demanded the release of one of their undercover agents on Sunday after he was arrested by police in Delhi for allegedly supplying a mobile SIM card used by the Mumbai gunmen.

Mukhtar Ahmed, 35, originally from Indian-controlled Kashmir, was detained on Friday in Delhi. He is being held with another man, Tauseef Rehman, 26, who was arrested in his home city of Calcutta on the same day.

The detention of the two men, both now being held in Calcutta, had been hailed as a potentially key breakthrough in the Mumbai investigation.

The operation turned sour, however, after police in Srinagar, Indian Kashmir's summer capital, said that Ahmed worked for them, raising the possibility that an Indian agent aided the militants that committed India's worse terror attack in 15 years.

A senior officer in Srinagar, Kashmir's summer capital, said Calcutta police were told that Ahmed is "our man and it's now up to them how to facilitate his release".

He said that Ahmed was a Special Police Officer, part of a semi-official counterinsurgency network whose members are usually drawn from former militants.

"Sometimes we use our men engaged in counter-insurgency ops to provide SIM cards to the [militant] outfits so that we track their plans down," he said.

A police spokesman in Calcutta told The Times that his force was investigating the claims. He said the arrests of the two men were the result of the "very neat" cooperation of India's intelligence agencies.

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