The House of Saud’s embarrassment and frustration over the inquiry is said to threaten not only a £10 billion contract to buy Eurofighter combat aircraft from BAE Systems, but other lucrative deals with British defence and industrial companies.

A prominent Saudi businessman told The Times yesterday that it was a huge mistake for Britain to alienate the Royal Family, which controls all government contracts in a country flush with the proceeds of record oil prices.

“Saudi Arabia does not make commercial or defence decisions based on what shareholders or voters think,” he said. “It is run like a family business. If you upset members of the family, they will simply choose another supplier.”

Key figures in the Saudi Royal Family are understood to feel badly betrayed by the Government over public disclosures made during the Serious Fraud Office (SFO) investigation into alleged corruption. BAE is said to have established a slush fund, which it allegedly used to bribe senior Saudi officials to secure contracts.

A Whitehall source confirmed that the row over the SFO investigation was begining to sour broader diplomatic and commercial ties: “Saudi patience has entirely run out. This SFO investigation has been going on for years. The Saudis feel, rightly in my opinion, badly let down that Britain has not respected their confidentiality,” a Whitehall source said. “The contract is on the line, our relations with the Saudis generally are hitting the rocks. Everything is in jeopardy, including our anti-terrorism co-operation.”

Under Margaret Thatcher, Britain signed the al-Yamamah contract worth £40 billion for the sale of Tornado warplanes to Saudi Arabia. This year Saudi Arabia agreed to pay £10 billion for 72 aircraft, part of a package that was expected to grow. Now the contract, and with it thousands of defence jobs, are under threat.

British companies earn about £5 billion a year from defence exports, a quarter of which comes from Saudi Arabia. The Defence Industries Council (DIC), chaired by Sir John Rose, the chief executive of Rolls-Royce, is drafting a letter to the Government. British defence companies on the DIC, such as VT and Cobham, are not seeking to weigh in on the SFO investigation, but to give warning more broadly that Britain is offending a key customer. France, which lost a bid to supply Saudi Arabia with its Rafale fighter, made by Dassault Aviation, is believed to be dusting off its proposal if the Eurofighter deal collapses. “[President] Chirac is all over the Saudis like a cheap suit,” a British official said. “If we drop the ball, they are ready to pick it up.”

A senior Saudi official confirmed yesterday that the Royal Family felt let down by the SFO investigation. “The Kingdom is very bothered by the leaks made by people inside the British Government. Some documents were released when they should not have been. We are beginning to feel that somebody is deliberately trying to embarrass the Kingdom. It is a matter for the British to clear up.”

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