SYDNEY - A major scandal threatens to engulf the Royal Australian Navy after revelations that sailors from a Sydney Harbour base may have been selling drugs to foreign backpackers.

The Australian Defence Force (ADF) and New South Wales police confirmed yesterday that they are investigating an alleged drug-dealing ring operating out of Garden Island, the Navy's main base in eastern Australia.

Defence authorities said "a range of substances", including steroids, had been seized during a raid.

Dozens of sailors may have been involved in the trafficking ring, according to the Australian, which quoted an unnamed source as saying that drugs had been sold to young tourists.

Garden Island - used for naval activities for more than 200 years - lies just north of Kings Cross, Sydney's main nightlife district and the site of numerous backpacker hostels.

The allegations are the latest blow to the image of the Australian military, which revealed in June that nearly 600 personnel have tested positive for steroids and other illegal drugs in the past five years.

The figures were released after a commando was airlifted out of Afghanistan for treatment following a drug overdose - one of seven Australian soldiers caught abusing steroids in the country this year.

The Defence Department said it was "inappropriate to comment on the specific nature" of the Garden Island investigation while it was under way.

Police said no charges had yet been laid. They, too, refused to discuss the operation in detail, saying only that they were investigating "alleged illegal activity by Navy personnel at Garden Island".

A training and logistics centre also used for major fleet repairs and refits, the base - comprising an island connected to a shore-based facility - has a workforce of between 3000 and 4000 people which can rise to 6000 when ships visit.

Brendan O'Connor, the federal Home Affairs Minister, said yesterday that the allegations were being "taken very seriously".