The RAF is seeking to replace the Hercules - the workhorse for the British forces in Bosnia - with the C130J aircraft bought 'off-the-shelf' from America in a multi-million pound contract.
But the Government is under pressure from the aerospace industry to support an eight-nation consortium which wants British backing for the Future Large Aircraft (FLA) project that it claims would provide 10,000 British jobs over the next 10 years.
The Commons Select Committee on Defence is expected to throw its weight behind the FLA with a report on 30 March calling for the RAF Hercules fleet to be refurbished and the FLA consortium, known as Euroflag, to be given government backing.
Malcolm Rifkind, Secretary of State for Defence, threatened to resign if Britain pulled out of the European Fighter Aircraft project, but he has told colleagues he will not resign over the FLA project.
He is ready to support the RAF. He does not believe a replacement for the Hercules has the strategic importance of the EFA, a high-technology project, capable of defending Britain into the next century.
However, buying from the United States could upset trade and industry ministers, and open the Government to attack from the aerospace industry that it would threaten thousands of jobs. Defence ministers are braced for a Cabinet row later this year, when a feasibility study is completed.
British Aerospace, which forms the British part of the FLA consortium, is lobbying hard, warning it could damage British participation in civil aircraft projects, such as the future generation of the Airbus.