The row looked certain to revive concerns about the BBC's relationships with outside broadcasters in the developing world, which many believe lead inevitably to threats of censorship.
Orbit, owned by the Mawarid Group of Saudi Arabia, which had been providing the service to its subscribers in the Middle East, north Africa and Europe, said it had "unilaterally terminated" its contract with the BBC, following what it claimed were "many attempts to persuade the BBC to be more sensitive".
The BBC stood by its statement made on Monday that both parties "had given notice of their intention" to terminate the service, and that the two were seeking an agreed settlement of "outstanding matters". These were believed to include financial arrangements.
A spokesman added last night: "The BBC does not propose to discuss the legal issues whilst negotiations are taking place and possible legal proceedings are pending."
The controversial 10-year contract, worth about pounds 10m a year to the BBC, was fully financed by Orbit, although the service was produced by the BBC out of its studios in London, involving 250 staff.
The confidential contract, signed two years ago, gave the BBC editorial control, Orbit said, but only provided "cultural sensitivities" were observed. Orbit claimed that the BBC had promised to edit the programme prior to transmission. "This it did not do," Orbit said in its statement.
The BBC said it was "satisfied that it has complied fully with all the terms of its contract, including its obligations as to local sensitivities."
The BBC transmission on 4 April of a Panorama programme entitled "Death of a Principle" which was highly critical of Saudi Arabia's human rights record, led to the decision to terminate, Alexander Zilo, Orbit's president, said yesterday.
Commenting on the Panorama programme, the company said the producers had "assembled isolated incidents and interviews, many with admitted felons, to allege improprieties in the application of Islamic law. The tabloid and sensationalist representation triggered outrage in the Islamic communities of Europe, the Middle East and Northern Africa."
The BBC's arrangements with Orbit were unlike those it has established with other broadcasters, a BBC spokesman said. Generally, BBC Worldwide, the corporation's commercial arm, has packaged its news, entertainment and current affairs programming for broadcast outside the UK, in cooperation with private sector partners.
In the case of the Arabic service, the BBC produced original programming for a single client, supplementing this with programmes such as Panorama.
The BBC's use of outside broadcasters has already generated instances of censorship in overseas markets, critics allege. In Bahrain, last week's Panorama programme was twice scheduled to run on the state-owned main network, but was blacked out both times.
Star TV, controlled by media tycoon Rupert Murdoch, bowed to pressure from the Chinese government and removed the BBC World Service from its service in China.Reuse content