British troops are fighting a proxy war with Iran in Basra, according to the commander responsible for withdrawing forces from the Iraqi city.

“We are engaged – or we have been engaged – effectively in a proxy war,” Lt Col Patrick Sanders, commanding officer of 4th Battalion The Rifles, told the BBC.

British authorities have already warned Teheran about its interference in its neighbour’s affairs, particularly with regard to the smuggling of sophisticated explosives capable of penetrating armoured vehicles.

Coalition casualties have been rising in recent weeks, in part it is believed because the insurgents have access to more effective weapons. In one incident last month, three British troops died in a roadside bomb attack in Amarah, north of Basra. In another last week, 14 US marines were killed by one of the new devices near Haditha.

Now that the final 550 British soldiers have pulled out of their Basra Palace and handed it to the Iraqis, the security situation in the area can start to improve, Lt Col Patrick Sanders said.

“The Iraqi flag is flying over Basra Palace,” he said. “Basra is quiet and stable at the moment and it augurs well for the future.”

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“We are not necessarily in the endgame, but perhaps – to paraphrase Churchill – it is the beginning of the end,” he added.

British officials up to Gordon Brown himself have been forced to defend the decision to move troops out of the centre of Basra just as an American strategy of increasing the military presence in Baghdad appears to be paying dividends.

Lt Col Sanders echoed earlier statements that the withdrawal is not a defeat.

But he admitted that British forces may be forced to return to the heart of the city if militia loyal to the Shiite cleric Muqtada al-Sadr start targeting Iraqi troops.

And in a reminder of how unstable the situation in the country remains, the families of five Britons captured in May appealed to their captors to free the group.

American commanders believe the men are still alive but nothing has been heard from them since they were snatched from a finance ministry compound in Baghdad.

The Foreign Office has asked the media not to release details identifying the computer expert and four private security guards.