British Defence and Finance Ministry officials held talks to assess the financial implications if Britain cancelled part of its Eurofighter defence contract, defence sources said.

With the national budget under severe strain due to the economic crisis, the Treasury is reviewing spending on major contracts and has to give the go-ahead on all deals costing more than €430 million.

Under a long-standing agreement with Spain, Italy and Germany - its partners in Eurofighter - Britain is obliged to buy 88 of the aircraft as part of a third production tranche.

That number has already been reduced to an initial 40 after a compromise negotiated by Germany, with the remainder offset for a later production run, dubbed tranche 3b.

Yet even the cost of the 40 jets - of which 24 have already been set aside for Saudia Arabia - is proving a tough commitment for Britain. The 16 it would actually take delivery of will cost around €1.1 billion, defence industry sources say.

The Treasury is stalling on that sum, the sources say, but any cancellation of the contract would not necessarily mean a saving - since getting out would carry its own penalties and legal fees that could more than offset the €1.1 billion.

Discussions over the contract are complicated by the fact that senior Ministry of Defence officials are divided over the necessity of Eurofighter, with some seeing it as essential to Britain's future defence role and others as surplus to need.

"The Treasury and MoD are going to have to hammer out the details," a Defence Ministry source said of the talks, which he said began on Monday and may continue through the week.

Britain is under particular pressure from Germany to show its commitment to Eurofighter, which is being built by Britain's BAE Systems, Italy's Finmeccanica and EADS of Germany and Spain.

Not only is Eurofighter an important symbol of pan-European cooperation, but it involves the employment of up to 100,000 people worldwide, according to its supporters. BAE has said the contract is worth €2.2 billion to it alone.

With Germany holding elections in September, Berlin wants Britain to show its commitment to the third tranche - and pay up. Britain needs Germany to be committed to Nato operations in Afghanistan, where more troops are required.

The negotiations over Eurofighter cut to the quick of what combat role Britain sees itself playing as a global power - and whether it can really afford to play that role.

Britain has a range of defence contract obligations over the next six years: The A400M transport aircraft, the building of Type-45 destroyers, tactical submarines, two aircraft carriers and the joint-strike fighter as well as Eurofighter.

While major cuts to some contracts are possible, any cuts could carry financial penalties, political costs in terms of votes, and security costs if defence were compromised.

Rather than a headline-grabbing cancellation of a major contract, Keith Hartley, the director of the centre for defence economics at the University of York, expects "trimming".

"There might be the possibility of a small reduction in numbers (of Eurofighters) without too much of a penalty," he said. "But I think we'll fiddle around with the margins, make small reductions if we can, rather than cancelling."

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