* Lawyer met "Prisoner X" a day before his death
* Media reports say several Australian-Israelis under spy investigation
* Court stops short of confirming suicide was a Mossad spy
* Australia government says knew of case for two years (Adds prisoner charged with "grave crimes", court ordered inquiry into negligence concerning his death)
By Rob Taylor and Maayan Lubell
JERUSALEM/CANBERRA Feb 14 (Reuters) - An Australian immigrant, reported to have been recruited by Israel's Mossad spy agency, was charged with grave crimes before he committed suicide in an Israeli jail, one of his lawyers said on Thursday.
The closely guarded case has raised questions in Australia and Israel about the suspected use by the Mossad of dual Australian-Israeli nationals and the circumstances behind the 2010 detention and death of 34-year-old Ben Zygier.
Israel on Wednesday broke its silence over an Australian Broadcasting Corporation (ABC) report which said that Zygier, who moved to Israel, was jailed in isolation over suspected misconduct while spying for the Mossad.
Partially lifting a gag order on the case, an Israeli court said a dual-nationality citizen had been imprisoned secretly under a false name for "security reasons", and found dead in his cell in what was eventually ruled a suicide.
Israeli criminal attorney Avigdor Feldman said he met Zygier, dubbed "Prisoner X", a day before his death.
"I met with a balanced person, given the tragic outcome, who was rationally weighing his legal options," Feldman told Channel 10 Television.
Feldman said that Zygier was charged with "grave crimes" and that there were ongoing negotiations for a plea bargain. The attorney did not elaborate on the allegations, which he said Zygier denied. Reporting in Israel on the case has been subject to strict government censorship.
"His interrogators told him he could expect lengthy jail- time and be ostracized from his family and the Jewish community," Feldman said. "There was no heart string they did not pull, and I suppose that ultimately brought about the tragic end."
Australian media have reported that Zygier had been one of at least three Australian-Israeli dual nationals under investigation by the Australian Security Intelligence Organisation over suspicions of spying for Israel.
Australia complained to Israel in 2010 after forged Australian passports were among those used by what Dubai said was a Mossad hit squad that assassinated a top Hamas operative in the emirate. The killers, Dubai said, also had British, Irish, French and German passports.
Mossad is widely reputed to have stepped up its shadow war in recent years against Iran's nuclear programme, Lebanon's Hezbollah guerrillas, suspected nuclear procurement by Syria and arms smuggling to Palestinians through Dubai, Sudan and Egypt.
In an apparent reversal on previous statements, Australian Foreign minister Bob Carr said on Thursday his ministry had known about Zygier's jailing in Israel as early as February 2010. On Wednesday he said Australian diplomats in Israel only found out about the detention after his death in custody later that year.
In Israel, the possibility a Mossad officer had been treated so harshly drew comparisons to known cases when Israel jailed turncoat spies under blanket secrecy, sometimes lasting years.
Israeli intelligence veterans said such measures reduced the risk of enemy countries where the detainees had served learning of their true identities and then tracing their activities in order to expose other spies still under cover.
Israel's Justice Ministry said a court has ordered an inquiry into possible negligence in Zygier's death.
Zygier, who came from a prominent Jewish family in Australia and was buried in Melbourne, had been married with two young children. His relatives have declined all comment on the case.
Former friends in Australia said Zygier had been a lawyer and used to recount stories of his time in the Israeli military. Israel's Channel Two TV said Zygier had trained in the private law office of Yaakov Neeman, now the country's justice minister.
"I remember drinking with Ben one night in 2001 when he recounted his famous story of taking a bullet in the posterior," former colleague Patrick Durkin wrote in the Australian Financial Review newspaper.
Australian Foreign Ministry secretary Peter Varghese told lawmakers that the arrest of Zygier, also known as Ben Alon and Ben Allen, had not been secret because both his family and Australian intelligence officials had been notified.
Yet the official secrecy over the Zygier report, reinforced by military censors, caused an outcry in Israel, where reporters noted that their compatriots were but a mouse-click away from learning about the case from foreign media.
(Writing by Maayan Lubell and Dan Williams; Editing by Jeffrey Heller)