The Ministry of Defence confirmed that it was notified verbally yesterday that the order - for 230 battle tanks - would go to General Dynamic of the United States, which makes the Abrams M1-A2.
Vickers, the British engineering group that hoped to win the contract with its Challenger 2, said that the 1,600 jobs at its Newcastle and Leeds factories were not in immediate danger.
However, the company said that a new order was required within 15 months to keep the plants busy beyond 1996.
Ghazi al-Rayes, the Kuwaiti ambassador, denied reports that the decision had been affected by a letter from Dick Cheney, the US Defense Secretary, demanding that the Kuwaitis award the contract to the US before next month's presidential election.
It is understood that Vickers believes figures for the relative performance of the British and American tanks were unfairly represented to the Kuwaiti military council which made the decision on the tank order.
Sir Colin Chandler, Vickers' chief executive and a former head of defence procurement at the MoD, said: 'We made a bid last week, which was highly competitive.
'Our price per tank was cheaper than the Americans'. But we were not even asked to discuss the details with the Kuwaitis,' he said.
It is understood that President Bush plans to visit the General Dynamics factory where the tanks are made later this week.
The decision was a blow to Malcolm Rifkind, the Defence Secretary, who visited Kuwait last month to lobby for the Challenger.
Vickers is still in competition for other large orders from Oman, Saudi Arabia and the United Arab Emirates. Jonathan Aitken, the Defence Procurement Minister, is on a tour of the Middle East.
GKN, the engineering group, confirmed that it was also hopeful of securing a 'substantial' order from Kuwait for its Warrior armoured combat vehicles, which underwent tests at the same time as Vickers' Challenger tank.
Labour described the award of the contract as a 'slap in the face' for Mr Rifkind. George Foulkes, a Labour spokesman on defence, said the Government should protest to the Americans if there was evidence of US interference in the award of the order. 'If we don't protest to the Americans this time, we will get walked over next time.'
Mr Foulkes said he would be questioning ministers about the contract next week, when Parliament resumes after the summer recess.
Menzies Campbell, the Liberal Democrat spokesman, called on Michael Heseltine, the President of the Board of Trade, to intervene by setting a diversification programme for the British arms industry.
The loss of the Kuwaiti tank contract comes at a particularly bad time for Vickers. The company recently reported a pre-tax loss of pounds 4.1m for the first half of this year.
Vickers has been dragged into losses by its Rolls-Royce cars division, where sales fell 65 per cent in 18 months.
Vickers shares closed 6p lower at 84p yesterday.Reuse content