Washington, Israel's closest ally and provider of $2 billion in annual defence aid, was still restricting arms deals with Israel as a result of the disagreement. The US demands Israel adhere to US regulations.

 

Asked about the report, Prime Minister Ariel Sharon told reporters on Wednesday during a visit to France: "We definitely have a certain problem but I am convinced that we shall overcome this matter."

 

Washington is concerned Israel's sales of Harpy unmanned attack drones and other technology to China could tilt the balance of power and boost China's military strength, which could threaten Taiwan.

 

Israeli Foreign Minister Silvan Shalom publicly apologised to Washington in June over the arms to China, saying "things were done that were not acceptable to the Americans" and insisting Israel meant no harm to US interests.

 

Discreet dialogue

 

US froze defence projects with
Israel over the China issue

Following the Haaretz report, an Israeli Defence Ministry spokesman said the ministry was continuing its "informative and discreet dialogue with the United States with the hope to end the negotiation soon".

 

In Washington, State Department spokesman Sean McCormack said Israel and the Pentagon were still negotiating technical details of a "memorandum of understanding" about arms sales.

 

 "Israel is a close friend and ally, so those discussions continue in an open and frank way," McCormack told reporters.

 

The US, a long-time partner in Israeli weapons sales, began freezing mutual security projects and delivery of defence equipment to the Jewish state last month following the arms deal with China.

 

US demand

 

Haaretz said that since the restrictions were applied, Israel had not complied with a US demand to ensure they did not go against US policy.

 

 "Israel is a close friend and ally, so those discussions continue in an open and frank way"

Sean McCormack,
US State Department spokesman

The US wants Israel's parliament to pass a bill within 18 months that would tighten its monitoring of military exports, as well as an apology from Mofaz, the newspaper said.

 

Mofaz's trip had been expected in the first half of August.

 

Israeli security officials have said US restrictions could hinder its future sales of arms to other countries.

 

Israel's embassy in Washington said last month that US and Israeli negotiators were working on a pact to give the US more say over Israeli arms sales to China by bolstering "coordination and transparency between the two governments".

 

Washington torpedoed Israel's multibillion-dollar sale of Phalcon strategic airborne radar systems to China in 2000, citing fears it could upset the regional balance of power.