Nearly £200 million was wiped off the market value of BAE Systems this morning, as the company faced renewed allegations of channelling funds to Saudi officials to win new contracts.

Shares in BAE Systems were the biggest faller on the FTSE 100 as the defence group denied allegations that it secretly channelled £1 billion into an account controlled by Prince Bandar, the former Saudi Ambassador to the US, in connection with the UK's biggest weapons deal known as the al-Yamamah contract.

Prince Bandar served as Saudi Ambassador to the US for 20 years and was the architect of the £43 billion al-Yamamah deal in the 1980s to sell warplanes to Saudi Arabia.

Shares in the defence and aerospace group were trading down 5.25p at 433.25p by 10.45.

BACKGROUND

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The reports come six months after the Serious Fraud Office dropped its investigation into possible wrongdoing.

BAE Systems said in a statement:that it denied "all allegations of wrongdoing in relation to this important and strategic programme and we will abide by the duty of confidentiality imposed on us by the agreement”.

Mike Turner , its chief executive told Thomson Financial News: “I just think it’s very unhelpful for the British press and media to report in this way allegations against a very important customer and more importantly a great ally in the Middle East”.

The BBC and The Guardian newspaper, citing insider legal sources, reported today that the funds had been paid into the accounts held by Prince Bandar over a period of at least a decade.

The reports allege that payments of up to £120 million a year were channelled into two Saudi Embassy bank accounts in the US and were made with the full knowledge of the Ministry of Defence,

The BBC reported that the accounts were conduits to the prince’s private funds, citing David Caruso, an investigator who worked for the American bank where the accounts were held.

The Serious Fraud Office (SFO) is reported to have uncovered the payments to Prince Bandar during its investigation into transactions related to the arms deal, although it dropped the investigation in December after Lord Goldsmith, the Attorney-General, said that it could jeopardise British national security.

BAE said in a statement that the al-Yamamah programme was a government-to-government agreement “and all such payments made under those agreements were made with the express approval of both the Saudi and the UK governments”.

It said that it had made available to the SFO all information regarding the al-Yamamah contract in its possession in the last two and a half years.

“After an exhaustive investigation, it was concluded, over and above the interests of national security, that there was and is no case to answer,” the statement said.

“As the media itself has reported, a spokesman for the Attorney-General has confirmed that nothing in today’s media reports alters this position.”

The MoD declined to comment on the allegations, saying in a statement that “to do so would involve disclosing confidential information about al-Yamamah, and that would cause the damage that ending the investigation was designed to prevent.”

The Government’s decision to end the Saudi inquiry provoked international criticism.

Tony Blair said today that an investigation "would have involved the most serious allegations in investigations being made of the Saudi Royal family". The Prime Minister said such an investigation would have led nowhere, "except to the complete wreckage of a vital strategic relationship for our country in terms of fighting terrorism, in terms of the Middle East, in terms of British interests there, quite apart from the face that we would have lost thousands, thousands of British jobs."

The Campaign Against Arms Trade today said it challenge the refusal of a judicial review of the government’s decision to abandon its investigation into the alleged bribery by BAE.

The Organisation for Economic Co-operation and Development said that its working group on bribery had serious concerns about the decision, and the US Government issued a formal protest against it in January.

BAE confirmed last month that despite the abandoning of the Saudi investigation, it continued to face investigations into its dealings in six countries, including Romania, South Africa, Tanzania, Chile, the Czech Republic and Qatar.

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