The Treasury is fighting a diplomatic and political battle to wriggle out of a contract to buy fighter jets for the Royal Air Force and save the taxpayer more than £1 billion.

Britain is committed to buy 40 Eurofighter Typhoons, part of the third tranche of fighter jets to be built by the four-nation Eurofighter consortium. Work on the jets is scheduled to commence this summer.

Angela Merkel, the German Chancellor, has made a personal plea to Gordon Brown to ensure that Britain honours a contract agreed more than a decade ago. Germany, Italy and Spain are committed to buy their share of 112 aircraft that will be built in the first stage of Tranche 3. However, the Treasury is fighting to cut or postpone this part of military procurement at a time when the Treasury is urging spending cuts.

Defence industry sources believe that the governments are wrestling with a compromise that will involve the assignment of part of Britain's order to Saudi Arabia, which has agreed to buy 72 Eurofighters for its air force. However, the RAF wants the jets and the Ministry of Defence is pushing hard to convince the Treasury that it must honour the contract.

Transferring jets earmarked for Britain to the Saudi export order would reduce the commitment for 40 to 16 aircraft but would still leave the Treasury with a financial liability of more than £1 billion. The MoD, with a capital procurement budget of about £9 billion per year, is already struggling to cope with commitments to fund new aircraft carriers and destroyers for the Royal Navy, as well as a transport plane and a variety of land-based armoured personnel carriers.

“The real problem for the Treasury is that the Typhoon contract was locked down very hard by Britain,” an official at a leading defence contractor said.

According to Francis Tusa, a defence industry analyst, Britain created a rod for its own back when it insisted that the original contract between the Eurofighter partners be watertight. “It's a legally binding contract with penalties for default. If going ahead costs you 100, pulling out could cost you 130.”

Britain's insistence on onerous penalties in the 1998 Eurofighter contract stems from previous rows over defence procurement with its partners, notably a late withdrawal by Germany from a commitment to buy Tornado aircraft.

Britain is committed to buy 88 Eurofighters in the third and final tranche of the contract, which comprises a total of 236 aircraft. In order to alleviate the burdensome financial commitment, the third tranche has been split under a compromise proposed last month by Germany. A new Tranche 3a has been created, in which each country takes 45 per cent of its Tranche 3 order, reducing the total output to 112 and Britain's commitment to 40 aircraft.

However, the Treasury is balking at the estimated €100 million (£89 million) cost of each jet, including overall production costs. A failure among the partners to agree to launch production of Tranche 3a over the next few weeks would lead to work stoppages at aerospace factories in Europe that are building parts of the aircraft.

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