Revealing the decision, the Israeli daily newspaper Haaretz on Sunday said the decision could strain newly repaired relations with Beijing.
The United States has imposed a series of tough military sanctions in response to Israel's deal to service Harpy drone aircraft parts for China, Israeli officials say.
China sent the parts to state-owned manufacturer Israel Aircraft Industries last year for what Israel says was routine maintenance. Washington contends it was for an important technological upgrade. Israel originally sold China the drones in the 1990s.
The US fears an arms build-up by China could threaten Taiwan and US forces in Asia.
A Defence Ministry delegation left Israel on Sunday for the US for talks on the issue, said ministry spokeswoman Rachel Niedak Ashkenazi.
She refused to confirm or deny the Haaretz report, saying only: "Proposals and agreements will be discussed within the framework of the ongoing discussions."
But defence officials, speaking on condition of anonymity because of the sensitivity of the matter, confirmed that Israel would agree to confiscate the drone components.
China is yet to respond to Israel's
reported decision to end the deal
The officials said Israel would also sign a joint memo granting the Americans the authority to veto Israel arms sales to certain countries.
The US embassy in Tel Aviv confirmed discussions on arms sales to China were under way, but did not provide further details.
According to Haaretz, Israeli Prime Minister Ariel Sharon on Friday instructed the Israeli delegation to agree to all US demands. Officials in Sharon's office declined to comment.
While Israel and the US have been reluctant to air the dispute publicly, Israeli Foreign Minister Silvan Shalom and American Secretary of State Condoleezza Rice have acknowledged the crisis and expressed hopes it would soon be resolved.
China's Ministry of Foreign Affairs did not immediately respond to media queries about the reported Israeli decision.
Confiscating the Chinese parts would likely strain Israel's relations with Beijing, which have only recently recovered from a similar debacle.
In 2000, Washington torpedoed a $2 billion Israeli sale of Phalcon reconnaissance planes to China. The botched deal caused ill will between Israel and China that was resolved only after Israel paid hundreds of millions of dollars in reparations.
Damage in ties with the US could
be more harmful to Israel
But damage in relations with the US, Israel's closest ally, could be more harmful to Israel.
In response to the Harpy deal, the US reportedly halted cooperation on several projects, froze delivery of sensitive equipment and is refusing to answer telephone calls from Israeli defence officials.
Washington has also frozen Israel out of the development of Lockheed Martin's F-35, a next-generation warplane being developed with several foreign participants.
It is demanding that Israel agree to a host of concessions, including US supervision over some arms sales, as a condition for repairing the relationship.