Israel is close to signing a deal with the US regulating arms sales after incurring Washington's wrath over a defence contract with China, said officials.
Defense ministry spokeswoman Rachel Ashkenazi said negotiations "to reach an understanding with the United States are at an advanced stage" after Israel effectively apologized to Washington over the controversial deal to upgrade Harpy Killer drones which it had sold to Beijing.
The Haaretz newspaper said the agreement will mean Israel having to renege on the drones deal, leading to the likelihood that China will demand multi-million dollar compensation for the second time in five years.
Israel had to pay Beijing US$350 million in compensation after breaking an agreement in 2000 to supply Falcon airplanes with an AWACS radar system.
According to Haaretz, the memorandum of understanding will declare that the US and Israel are "strategic partners" and will be considerate of the other's concerns about the transfer of military technology to third countries.
Countries "arousing concern" will be specified separately.
The new accord will also stipulate that the US cannot ban defense deals on commercial grounds after anger among the Israeli defense industry that business interests lay at the heart of the row over the drones deal with China.
Israel's ambassador to Washington, Danny Ayalon, told the paper that the agreement will "help prevent misunderstandings in the future."
"The agreement will also help our defense industries to better penetrate the mammoth American market, which is much bigger than the Chinese market," he added.
Israel's ties with its usually staunch US ally took a major hit from the row over the drones deal, with the Pentagon imposing some restriction on arms sales and technology transfers to Israel.
Israel's foreign minister, Silvan Shalom, moved to defuse the row during a visit by US Secretary of State Condoleezza Rice earlier this month, expressing "regret that these sales could have damaged the interests of the United States."
In a sign of Washington's wariness of China's growing military power, US Defense Secretary Donald Rumsfeld warned earlier this month that China is spending much more on a major military buildup than officially acknowledged, putting at risk the military balance in the region.
The US has also been vigorously lobbying against moves by the EU to lift the arms embargo it slapped on China after the June 1989 crackdown on pro-democracy students in Beijing.