The Age, an Australian newspaper, reported the deal costing $6.8 million is being negotiated to end the plight of the sheep adrift on board a ship in the Gulf after being rejected by Saudi Arabia on grounds of disease.
But the Australian government refused to say if it was planning to buy the sheep on board the Cormo Express from ther Saudi importer, or if it was in talks with Iraq.
"The government will not comment until we have a level of comfort that any commercial arrangements regarding the sheep are firm and the diplomatic relations are bedded down," a spokesman for Agriculture Minister Warren Truss said.
The Age further reported that Cormo Express was already on its way to the Iraqi port of Basra and arrangements were being finalised with the British government to unload them there.
The ordeal of the sheep on board the Cormo Express began last month after their Saudi importer refused to accept them. Australia has refused to take them back either, while several other countries turned down offers to accept them as gifts.
Packed in the ship under stressful conditions, over 4000 sheep are said to have died. Cormo Express has since acquired notoriety as the "ship of death" and the plight of the sheep have triggered a global outcry.
Animal rights activists have called for the sheeps' immediate humane slaughter and a ban on Australia's live export trade.
The Royal Society for the Prevention of Cruelty to Animals on Friday launched an advertising campaign, urging Australians to write to the government and demand an "end to the suffering" of the sheep.