Israel is to hand a seven-figure cheque to the family of a suspected Israeli-Australian spy who allegedly committed suicide at a high-security prison in Tel Aviv three years ago.

The justice ministry said it agreed to pay 4m shekels ($1m, £710,000) in compensation to the family of Ben Zygier, a 34-year-old inmate who was known only as Prisoner X before his identity was revealed in February.

"After negotiations, the two parties [Israel and the family] have reached an agreement whereby the state will pay 4m shekels [$1.1m or 842,000 euros] to the deceased's family," the ministry said.

In return for the money, Tel Aviv is to be absolved of responsibility for Zygier's death.

The father-of-two was found hanged in his high-security cell at Ayalon prison in Ramla, which was built to hold Yigal Amir, the assassin of prime minister Yitzhak Rabin in 1995.

Zygier's family accused the government of negligence, because staff at Israel's top detention facility failed to prevent the suicide.

A judicial inquiry into the death found that Zygier's cell was not properly watched by prison guards, despite the ex-spy being suicidal. The prisoner had an emotionally-charged exchange with his wife the day he was found dead.

The ministry said the deal was an "admission of alleged wrongdoing" but was struck to prevent the affair landing in court, leading to the publication of details of Zygier's case that could have damaged national security.

Zygier moved to Israel from Melbourne in 2000 and joined Israeli spy agency Mossad. Ten months before his death, he was jailed for unknown reasons under the name Prisoner X.

According to media reports Zygier was leaking secrets to Hezbollah in Lebanon as well as to Australia's domestic intelligence.