The government yesterday enraged its backbench critics, supporters of the Palestinian cause and human rights groups, by allowing the export of British components for US F16 warplanes sold to Israel.
In a move which ministers said was dictated by the interests of British arms companies, the foreign secretary, Jack Straw told MPs that stopping the supply of the F16 parts would have "serious implications" for defence relations with the US.
He announced new export guidelines agreed by the trade and industry secretary, Patricia Hewitt, covering British components that would be incorporated in weapons systems sold on to third countries, in this case Israel.
Downing Street earlier said the guidelines reflected the "new reality" of the multinational defence industry. "If there is any doubt about our re liability as a supplier the Americans will go elsewhere on the JSF," a minister said referring to the £100bn joint strike fighter project due to enter service with the US air force and the RAF in the next decade.
BAE Systems, Britain's largest arms company, supplies head up display units (HUDs) for the F16s to be to be sold to Israel. Downing Street admitted these amounted to "only 1% to that particular aircraft".
However, despite the government's existing policy of refusing to issue export licences for equipment if it could be used against the Palestinians in the occupied territories, and the anger which the move would provoke, Tony Blair's allies are afraid that any wavering on the "new realities" of multinational defence projects would jeopardise many other lucrative contracts.
Leftwing MPs, including Alice Mahon, demanded a Commons statement, predicting that the EU - more critical of US-Israeli intimacy than Britain - would be dismayed. When the region was again on the brink of war the rule change was "an absolute scandal", Ms Mahon said.
Menzies Campbell, the Liberal Democrat defence spokesman called it a "clearly rushed and reactive change of policy [to] provide maximum flexibility and minimum accountability" - a form of absolute discretion that would "open the door to any arms exports of any kind".
He again called for prior parliamentary scrutiny of such deals. The US congress has such scrutiny - which forced the Reagan White House to engage in clandestine sales to Iran to finance its illegal contra forces in Nicaragua in the 1980s.
"Anything that undermines the commitment not to export kit to Israel that could be used in the occupation of the occupied territories would be a significant change in policy," said Roger Berry, chairman of the Commons arms committee.
The shadow foreign secretary, Michael Ancram, also stressed the need to draw a proper distinction between arms needed for the protection of a state and those that could be used for internal repression.
The Guardian has revealed that British equipment is used in Israeli tanks and attack helicopters, the main weapons used against Palestinians in the occupied territories.
Israeli Merkava tanks have been equipped with cooling systems made by the Airtechnology Group, the Surrey-based company confirmed yesterday. British equipment is also used in US Apache helicopters supplied to Israel.
Mr Straw told MPs the US-UK defence relationship was "fundamental" to the Britain's national security. He added: "The state department has been monitoring Israeli actions carefully."
Phil Bloomer, an Oxfam spokesman, said the proposed sale was a dangerous precedent which could easily lead to British arms turning up in the world's bloodiest conflicts.
