Israel has agreed to consult with the US government before attempting to sell weapons technology to China or other nations.
The understanding completed Tuesday "ends the dispute" and "fully restores the confidence of the United States," Israeli Ambassador Daniel Ayalon said.
The Bush administration had complained about Israel's intention to service spare parts for unmanned Harpy aircraft already sold to China.
The administration objected on grounds it would upgrade China's anti-radar aircraft.
Several rounds of talks were held in Washington, the last in July, before the agreement was signed by Secretary of Defense Donald Rumsfeld in Washington and Israeli Defense Minister Shaul Mofaz in Israel.
The text is classified and was not provided to reporters, but Ayalon provided some details in an interview with reporters on Tuesday at the Israeli Embassy.
"It ends the dispute," he said. "This is the most important thing. It creates a basis for renewed confidence and cooperation between the two defense establishments."
Ayalon said the understanding did not encompass details of any proposed deal. "It deals with principles," he said. "And the major principle is mutual consultation."
"I can assure you Israel will be extra-careful now," he said.
"There are no winners, there are no losers," Ayalon said. "This is a win-win situation. Both parties win strategically."
However, he also said Israel would not do anything to hurt its good relationship with the US, a longtime ally that provides more than US$2 billion a year in economic and military aid to Israel.
Pentagon spokesman Bryan Whitman said the US will not have a veto power over any possible arms sales, but US officials will be informed and have a chance to express their opinion.
The Pentagon has complained about several potential Israeli sales to China, including the Israeli plan to service spare parts for unmanned Harpy aircraft. The Pentagon regards the Chinese military as a potential long-term adversary.
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