Fears are mounting that Saudi Arabia is about to cancel a £10bn deal to buy British-built Eurofighter Typhoon jets and purchase a rival French aircraft instead because of a long-running fraud inquiry into its relationship with BAE Systems
Sources close to the negotiations say that the Saudis could decide to order between 24 and 36 Rafale fighters from Dassault, of France, in the next few days.
Such a move would be a huge blow to the UK defence industry and the 50,000 jobs which are dependent on the Eurofighter programme. Apart from BAE Systems, which employs 9,000 people at Warton in north-west England making the Eurofighter, other big companies such as Rolls-Royce and Smiths Group would also be badly affected. BAE shares fell 3 per cent yesterday as concerns grew in the City that the lucrative order was about to be scrapped.
The Saudis are understood to be furious at Britain's failure to close a Serious Fraud Office investigation into allegations that a £60m slush fund was used to bribe members of the Saudi royal family involved in the Al Yamamah arms-for-oil deal.
The SFO investigation began three years ago and has spread from the deal with Saudi, in which BAE is the prime contractor, to UK arms contracts involving South Africa, Romania and the Czech Republic.
The final straw is understood to have been the SFO's decision to investigate a number of Swiss bank accounts said to be linked to payments to members of the Saudi royal family.
"This isn't sabre-rattling any longer. The sabre is out of its scabbard and is being brandished over our heads," one UK defence source said. "The Saudis are serious about switching to the French and it could happen in the next 24 to 48 hours."
The UK government announced the deal with the Saudis just under a year ago and signed a memorandum of understanding with the kingdom two months ago. Under the agreement, the Saudis would buy 72 Eurofighter aircraft to replace older Tornado jets that had been bought in the 1980s and 1990s from BAE under the original Al Yamamah contract.
The British ambassador to Saudi Arabia, Sherrard Cowper-Coles, is understood to have been working frantically to save the deal. He met the Saudi defence minister, Crown Prince Sultan, over the weekend.
The embassy in Riyadh said it could not interfere in or prejudice the SFO investigation. But behind the scenes it is thought to be deeply concerned about the damage which the inquiry is doing to trade relations between the UK and Saudi Arabia.
The French have never given up the hope of snatching back the Saudi contract from Britain and they have been making representations at the highest level in Riyadh, led by President Jacques Chirac.
Sources said that although Margaret Beckett, the Foreign Secretary, appeared not to have been involved in calming the situation, the Government was beginning to realise the seriousness of the situation.
It is not clear, however, that British ministers can intervene in the matter without it appearing that the SFO investigation has been stopped on the orders of Saudi Arabia.
Mike Turner, the chief executive of BAE, has maintained throughout that the company has broken no laws. But he now wants the SFO to say whether it intends to press charges or drop the investigation. The SFO would only say that its investigation was ongoing.