The Israeli government is forming a special team to manage the fallout from reports that software developed by Israeli firm NSO was used by governments around the world to spy on journalists, human rights activists and possibly world leaders, two Israeli officials tell me.

Why it matters: So far, this is primarily a media crisis for Israel. But senior Israeli officials are concerned it could morph into a diplomatic crisis.

Driving the news: An international consortium of investigative journalists reported on Sunday that NSO's "Pegasus" software — designed to track terrorists and criminals — had become a valuable tool for governments to spy on journalists and critics. Among the countries listed in the reports as NSO clients are Hungary, India and Saudi Arabia.

• The Israeli officials told Axios that NSO's export license included terms about the misuse of spyware, the reports would likely influence future deals involving NSO and other Israeli companies.
• “It is a very substantial crisis," a senior Israeli official told me. "We are trying to fully understand its ramifications. We will have to check whether the reports about NSO warrant a change in our policy regarding the export of offensive cyber technology to other countries."

What they're saying: A hint of the possible diplomatic fallout was provided Wednesday by the U.K.’s cyber czar, Lindy Cameron.

• “We now see states that cannot build high end capability being able to buy it," Cameron said at a cyber conference in Tel Aviv, adding that it was "vital that all cyber actors use capabilities in a way that is legal, responsible and proportionate to ensure cyberspace remains a safe and prosperous place for everyone. And we will work with allies to achieve this."

Israeli Minister of Defense Benny Gantz spoke at the same conference and said Israel was "studying" reports about the alleged use of the Pegasus software in violation of the terms of its export license. 

• “We approve the export of cyber products only to governments and only for lawful use in order to prevent crime and terrorism. Countries who purchase those systems must adhere to the conditions of use," Gantz said.
• NSO continues to deny the reports and claim to have taken all possible steps to ensure its software wasn't used for anything other than fighting crime and terrorism.  

Details: The interagency team includes representatives from the Ministry of Defense, which is in charge of defense export licenses, the Foreign Ministry, the Ministry of Justice, the Mossad spy agency, military intelligence and other agencies.

What's next: The team plans to start a discussion with NSO about the reports while also performing damage control over the diplomatic, security and legal ramifications, the Israeli officials said.