Israeli security sources said on Monday that Tel Aviv had signed the deal to buy the new Dolphin-class submarines at a discounted price of some $325 million each after Berlin agreed to accept payment over 10 years.
They said despite deep cuts foreseen for Israel's defence budget, military chiefs decided that the submarines were needed to counter long-range threats.
A senior source said: "The order has been signed, and the Germans have provided an export licence. It is now a matter of finding the $650 million that we have to pay over the next 10 years, although delivery of the Dolphins is expected before that."
Monitoring the enemy
Israel, believed to be the Middle East's only nuclear power, already has three of the diesel-powered Dolphins.
According to security sources, Israel's Dolphins go as far as North Africa and the Gulf to monitor enemy capabilities.
"The order has been signed, and the Germans have provided an export licence"
Senior Israeli source
Analysts believe that they carry nuclear missiles for a "second-strike" retaliation should Israel come under catastrophic attack.
Israel does not comment on its assumed atomic arsenal under a policy of "strategic ambiguity".
Tensions between Israel and Iran escalated after Mahmoud Ahmadinejad, the Iranian president, called in October for the Jewish state to be "wiped off the map".
Iran later said the remarks, which drew global censure, did not constitute a threat.
Iran, the world's fourth-biggest oil producer, says its nuclear programme is for energy needs only.
Ariel Sharon, Israel's prime minister, said last week that the Jewish state could not accept the emergence of a nuclear-armed Iran, but he steered clear of issuing any military threat.