The move, which is expected to be announced shortly, will be justified on the grounds that there is no evidence that the planes have been used in keeping down citizens. But it will anger human rights groups which argue that the Indonesian regime has one of the world's worst records of repression.
The Foreign Office, Ministry of Defence and Department of Trade and Industry are drawing up new criteria under which arms sales would go ahead. Those are expected to centre on the evidence or likelihood of pieces of equipment being used against dissidents or civilians.
Campaigners against the arms trade have repeatedly claimed that Hawk jets have been used to attack civilians in occupied East Timor but the reports have always been strongly denied. Last week a senior Government source said no satisfactory evidence had been produced.
Applying the new principles may make selling other arms, such as Scorpion armoured vehicles, that were ordered under the last government, more difficult to justify, and is likely to result in their export being blocked.
At the same time all overseas aid, including that to Indonesia, is being reviewed by Clare Short, Secretary of State for International Development. That means the Government could take other sanctions against the regime in addition to the cancellation of contracts for armoured vehicles.