An employee of mining giant Rio Tinto PLC being held in China is suspected of espionage, the Australian government said, in the latest twist to the company's increasingly fraught relationship with the country that is its biggest market for iron ore.

Stern Hu, general manager in China of Rio's iron-ore division, has been accused of stealing state secrets and could be charged, Australian Foreign Minister Stephen Smith said Wednesday. He is one of four Rio employees held by Chinese authorities since Sunday. Mr. Hu is an Australian citizen; the other three are Chinese citizens.

The case is an unusual example of China's secretive national-security apparatus becoming involved with a multinational company. The line between commercial information and state secrets is often not clear in China, where many major companies are controlled by the government. Given such uncertainty, the investigation has the potential to be chilling for foreign businesses.

Mr. Smith said there is no connection between the detentions and Rio's negotiations with China over iron ore, or with Rio's recent failed alliance with Aluminum Corp. of China, or Chinalco. "I've seen no evidence and I have no basis for any such speculation," he said.

The case comes at a time of rising tension between China and the mining giants over iron-ore prices. China has been holding out for a cut of at least 40% from last year's contract prices, but other Asian steelmakers have already settled deals based on cuts of 28% to 33%. A Chinese newspaper reported Wednesday that China had reached a six-month supply deal at a price cut of 33% to 44%, but two industry executives said the talks are continuing.

While the four Rio executives detained in China have no direct role in the negotiations, their sales strategy may be undermining China's efforts to maintain a united front in the talks, according to an analyst in Shanghai.

Australian iron-ore producers, including Rio and BHP Billiton Ltd., have this year adjusted their sales strategy in China to directly target smaller steel producers, said the analyst, who added that Mr. Hu led this effort. "These sales efforts are targeting China's smaller mills," he added.

The Chinese Iron and Steel Association, which represents most of China's steelmakers, has criticized the mining companies for the shift. These side negotiations have been going on for several months, they said, and have yielded discounts of about 25% for the smaller producers.

Executives within the mining companies say the side deals are a sore spot for the Chinese, who see this undermining their negotiating power. The strengthening Chinese economy is also working against China's bargaining position. As Chinese mills increase production, spot prices for iron ore are rising, reinforcing the view of miners that they don't need to offer deeper discounts.

A former iron-ore negotiator for Vale SA, a Brazilian mining company, said he saw the Chinese government's actions against the Rio executives as "an element of pressure" in the negotiations, which he described as a "giant chess game."

China's government hasn't commented publicly on the situation, and the foreign ministry and other government agencies didn't respond to requests for comment. "We have been advised by the Australian government of this surprising allegation," a spokeswoman for Rio Tinto said. "We are not aware of any evidence that would support such an investigation."

The dependence of Australia's resource-heavy economy on demand from China, as well as China's attempts to balance its purchases by investing in Australia, has made relations between the two nations increasingly tense. The detentions were angrily denounced Wednesday by Australian opposition lawmaker Barnaby Joyce, who has opposed investments by Chinese firms.

Rio last month walked away from what would have been a landmark $19.5 billion alliance with Chinalco in favor of a tie-up with BHP Billiton, a move that was harshly criticized in China.