The controversial trade is worth tens of millions to Australia a year

The Australian authorities have been trying to find a new taker for the sheep after they were rejected on health grounds by Saudi Arabia.

But a statement said recent newspaper reports suggesting a deal has been struck with the governing council in Iraq were "incorrect".

"The Australian Government and industry continue to be involved in a number of sensitive negotiations with a number of countries and organisations in an endeavour to arrange a suitable destination for the sheep as soon as possible," it said.

The sheep, which have been at sea for more than seven weeks, are currently aboard the Dutch-owned Cormo Express, off the coast of the United Arab Emirates.

"The sheep won't dock anywhere till there's a deal done, because that would not be a good outcome for the sheep," Tim Langmead, spokesman for Australian Agriculture Minister Warren Truss was quoted as saying on Saturday.

Australia, the world's largest exporter of livestock, has been offering the animals to other countries free of charge - without success - in an effort to resolve the crisis.

'Living hell'

The problem began when Saudi Arabia rejected the sheep, claiming that too many were diseased with "scabby mouth" - a claim disputed by Australia.

Welfare campaigners claim 6,000 animals on board the livestock freighter have now died.

Animal welfare groups have begun an advertising campaign to highlight what they describe as the "living hell" the sheep are enduring.