The newspaper quoted senior government sources as saying foreign spies were as numerous and active in Australia today as at the height of the Cold War.

The biggest concern, they said, was a new push by China in recent years to gather intelligence on military-related technology and strategic policy secrets.

"China would be the biggest now by a fair way," said one source, who said Chinese spies now outnumbered Russian agents who were previously Australia's biggest espionage concern.

"They have built up their capabilities over the last 10 years and are more aggressive in their activities," the source was quoted as saying.

"Espionage is the forgotten side of the intelligence game but it remains alive and well."

The new counter-espionage unit has been set up within the Australian Security and Intelligence Organisation (ASIO), the government's main intelligence agency, and is already operational, The Australian said.

The staff size and cost of the unit remain confidential, it said.

Most of the spies worrying ASIO operate out of embassies under diplomatic cover, but some work undercover as businesspeople or other professionals, it said.

Attorney-general Philip Ruddock refused to comment directly on the report Thursday but said ASIO's budget had been increased to ensure it could deal with counter-terrorism issues, as well as its traditional counter-espionage role.

"Counter-terrorism has been an important, recent role for it to fulfil," he told commercial radio.

"It has had an impact upon its ability to deal with counter-espionage, and we've ensured that it has the resources to do both tasks."

China has one of the largest diplomatic corps in Australia, with 40 registered diplomats.

Chinese-Australian ties were strained in 1995 by revelations that the embassy in Canberra had been bugged as part of a joint US-Australian operation.

In 1993, Australia expelled six Russian diplomats for spying, and late last year an Israeli diplomat, Amir Laty, was sent home, reportedly on the basis of ASIO reports into his activities in Australia.

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