They said the employee of US oil services firm Schlumberger, identified by Iraqi officials as a Briton, had yesterday tried to remove flags and pamphlets commemorating Imam Hussein, a venerated figure in Shiite Islam, just days before annual rituals marking his death.
Prime Minister Nuri al-Maliki also waded into the dispute, calling for the deportation of the oil worker, who he said was an engineer.
The incident took place at the Rumaila oilfield in south Iraq, where Britain's BP and China's CNPC have been working with oil services companies to ramp up output.
"He was transferred to Al-Fayhaa hospital in Basra, and he is now in the custody of Iraqi forces."
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Shaddad said there were demands for Schlumberger's offices in Basra to be closed and its foreign staff deported.
Maliki himself issued a statement calling for the oil worker to be deported, while also urging local residents to exercise restraint.
The incident follows a similar one days earlier in which an Egyptian employee of Baker Hughes, another American oil services firm, also tried to remove flags commemorating Imam Hussein and Imam Ali from vehicles he was to use.
The two incidents come amid commemorations marking the death of Imam Hussein in 680 AD at the hands of the armies of the caliph Yazid, which has over time come to mark the symbolic split between Islam's Sunni and Shiite sects.
To mark the occasion, millions of Shiites converge on the Iraqi city of Karbala, which houses a shrine to Imam Hussein.
Several foreign energy firms, including from the US, Britain and China, are operating on oilfields across southern Iraq as the country seeks to overcome decades of war and sanctions to boost output and fund much-needed reconstruction.