Saudi Arabia, BAE in talks on new arms deal-paper

RIYADH, Aug 10 (Reuters) - BAE Systems Plc (BAES.L) is in talks with the Saudi government over a second order of Eurofighter Typhoon aircraft that could be worth $38.6 billion, the UK's Sunday Times newspaper reported on Sunday.

"BAE ... may provide as many as 70 extra combat aircraft to the Saudis, although some defence industry executives say the contract is likely to be for 48," the Times reported.

"It is understood that senior staff from the (UK's Ministry of Defence) department recently visited Saudi Arabia to discuss the deal," it added.

Ahmed al-Shodokhi, from the Saudi Defence Ministry's media department, declined to comment on the report.

Saudi Arabia and its ally Britain, who have been signing arms deals since the 1960s, in September announced a 4.43 billion pound ($8.77 billion) contract for 72 Eurofighter aircraft in a contract that has raised bribery allegations.

The latest deal could be worth up to 20 billion pounds to prime contractors BAE Systems and to firms spread across Europe as well as in Saudi Arabia, analysts say.

"The new deal will be of a similar size," the Sunday Times said, noting that the talks which it said have been under way for some months.

Sources familiar with the negotiations over the previous contract have told Reuters that this pact will be paid for in cash from the Saudi budget instead of a previous formula that used oil shipments.

The Al Yamamah arms-for-oil pacts signed by Riyadh and London in the 1980s have produced an estimated 43 billion pounds in business, making them Britain's biggest export deals.

Critics of the deals, which sparked investigations by anti-corruption authorities in the UK and the United States, said the use of oil made it easier to conceal secret payments.

The latest Eurofighter deal took shape with a preliminary agreement in December 2005 but stalled as a probe by the UK's Serious Fraud Office into BAE's past Saudi deals angered the Saudi government.

Britain's highest court ruled in July that the Serious Fraud Office did not break the law when it halted a corruption investigation into arms deals with Saudi Arabia, overturning an earlier verdict.

In April, the High Court criticised the British and Saudi governments and said the SFO had been wrong to capitulate to threats from the Saudi royal family over arms deals with BAE Systems, Europe's biggest defence company.

But the House of Lords upheld an SFO appeal, saying the SFO's director had acted legitimately on fears that national security could be damaged and British lives put at risk by continuing the probe -- rather than commercial concerns.

Former Prime Minister Tony Blair strongly defended the SFO's decision to drop the investigation, arguing it would damage Britain's national security if Saudi Arabia stopped sharing anti-terrorism intelligence.

(Reporting by Souhail Karam; Editing by Jason Neely)