A MULTIMILLION-dollar arms trafficking industry that is funding the Eritrean military regime is behind the kidnap, torture and ransom of thousands of Eritrean refugees, according to a leaked report to the UN Security Council.

The investigation uncovered a trafficking highway running from the Eritrean highlands through Sudan's refugee camps into the Sinai desert, delivering arms to militant groups, and Eritrean asylum seekers to Bedouin gangs, who use electrocution, rape and murder to extort up to $40,000 from relatives in the Eritrean diaspora for their release.

According to witness testimony, part of the smuggled arsenal is sold to Palestinian militants in the Gaza Strip. This industry, run jointly by Eritrean officials, Sudanese and Egyptian smuggling gangs, is estimated to generate more than $10 million a year.

The monitoring group's findings were leaked on Monday, and place Eritrea in clear contravention of a sanctions regime imposed in 2009, which prevents it from exporting weapons. The report names General Teklai Kifle ''Manjus'', commander of Eritrea's western military zone, as the mastermind.

''Multiple independent sources in Israel and the Sinai have identified General Teklai Kifle Manjus … as well as a string of intermediaries, as being directly responsible for the cross-border smuggling of humans and weapons from Eritrea,'' it states. ''The weapons are generally described as Kalashnikov-pattern assault rifles and rocket-propelled grenades. Many bear the inscriptions of Eritrean military units to which they previously belonged.''

Tesfamariam Tekeste Debbas, Eritrea's ambassador to Israel, dismissed the allegations.

''If they can give 100 per cent evidence, then this guy [Manjus] will be in jail in Eritrea,'' he said. ''Where are the facts? One lie is repeated so many times it is like a truth.''

Eritrea, with a population of little more than 5 million, has one of the largest armies in Africa, made up of soldiers forced into national service.

President Isaias Afewerki justifies this with the threat of a renewed conflict with Ethiopia, from which Eritrea gained independence in 1992 during a decades-long war, which officially ended in 2000.

The UN estimates 3000 people left Eritrea in every month of 2011, most for Sudan or Ethiopia, many bound for Israel. These are the refugees who fuel the Sinai smuggling industry.

The UN High Commissioner for Refugees estimates that almost 60,000 Eritreans crossed into Israel from Egypt between 2009 and 2011.

Avi Granot, head of the Africa division in Israel's foreign ministry, denied any knowledge of Eritrean arms entering Sinai.

Eritrea was a strategic ally, he said, the one friendly port on the Red Sea. He also believed reports of trafficking and torture in the Sinai were ''grossly exaggerated''.