BRASILIA (Reuters) - New Brazilian President Dilma Rousseff has decided to delay awarding a multi-billion dollar Air Force jet contract and reevaluate the finalists' bids, in a move that could signal a realignment of Brazil's strategic and defence alliances, sources with knowledge of the decision told Reuters.
The surprise decision is a blow to France's Dassault (AVMD.PA), which as recently as last month looked like a lock to quickly wrap up the deal, and puts its U.S.-based rival Boeing (BA.N) clearly back in the running.
Rousseff's predecessor, Luiz Inacio Lula da Silva, had while in office repeatedly expressed his preference for Dassault's bid to build at least 36 Rafale jets at a cost of more than $4 billion as part of a long-running effort to modernize the Brazilian Air Force fleet.
The other finalists for the contract were the Gripen NG, produced by Sweden's Saab (SAABb.ST), and Boeing's F-18.
Lula left office on January 1 without resolving the issue, although many observers believed the final decision in favour of Dassault was a mere formality since Rousseff was Lula's chief of staff and she has retained many of his Cabinet members, including the defence minister.
Instead, Rousseff has opted to "start over" in her evaluation process with no clear preference for any of the finalists, a senior government source said.
"This is her decision now ... and she wants to look carefully at the details," the source said on condition of anonymity because of the sensitivity of the talks.
The deal is the centrepiece of Brazil's efforts to bolster its defence capabilities at a time when its clout in global affairs is growing in tandem with its economy.
In a sign that Rousseff is carefully reevaluating Boeing's offer, Rousseff personally asked U.S. senators visiting Brasilia last week for technology transfer guarantees from the U.S. Congress to bolster the Boeing bid, sources with knowledge of the conversation said.
Such transfers are critical to Brazil's ambitions to expand its own defence industry in coming years. The government is demanding that the winning bidder share its proprietary technology with Brazilian companies so they can incorporate it into their own planes in the future.
Each of the offers has strengths and weaknesses. Dassault's bid offers good technology transfers but carries a high price tag, officials have said.
Saab's bid could be held back by the perception that Sweden offers a less prestigious strategic relationship than France or the United States. Meanwhile, there are doubts about technology transfers within the Boeing bid.
Political considerations have also weighed. Brazil's relationship with the United States deteriorated in the final years of Lula's presidency, but Rousseff has shown clear signs of wanting to improve bilateral ties. Meanwhile, Lula had strong ties with French President Nicolas Sarkozy and signed a strategic defence agreement with France.
The delay is a setback for Sarkozy, who has invested considerable diplomatic capital pushing the deal, and members of his government expressed unease after news of Rousseff's decision broke early on Monday.
"It's legitimate for (Rousseff) to assert her authority," French Economy Minister Christine Lagarde told local radio.
"A huge amount of work has already been done on this. I hope the fruits of this labour will be taken into account," Lagarde added. "We're keeping our fingers crossed."
A spokesperson for Dassault declined comment on Monday. Shares of the company in Paris dipped more than 1 percent in early trade, but rallied by afternoon to trade unchanged.
A meeting in Brasilia last Monday indicated that Rousseff is at least shopping around.
Rousseff asked visiting U.S. Senator John McCain -- the ranking member of the Senate Armed Services Committee, which has jurisdiction over aeronautical issues -- and fellow Republican Senator John Barrasso if the U.S. Congress would be able to provide an additional, formal guarantee of technology transfers in the Boeing bid.
"It's relevant that she was the one who raised the subject," one of the sources said, also speaking on condition of anonymity.
McCain told reporters following his meeting with Rousseff that "there is concern about technology transfer."
"I intend to go back (to Washington) and make sure that it is very clear -- that both the president of the United States and the Congress of the United States make it clear -- that there will be complete technology transfer if the government of Brazil decides to acquire the F-18," McCain said at the time.
Boeing and U.S. officials including Defence Secretary Robert Gates have already provided guarantees regarding technology transfers, but Rousseff may be seeking more generous terms -- or additional promises that could help ease misgivings among senior members of Brazil's armed forces and Defence Ministry, many of whom have favoured the French bid.
It's unclear how long Rousseff's evaluation will take, the senior government source said. She could choose to review existing bids rather than demand a total do-over of the technical portion of the bids, which could take years.
A spokesperson for the president's office declined comment on Sunday.
The delay will prolong a process that began nearly a decade ago under Lula's predecessor, Fernando Henrique Cardoso, and has seen several ups and downs for the bidders.
The stakes only seem to grow over time. The contract will likely be worth much more than the initial bids, which have been reported by Brazilian media in the $4 billion to $6 billion range. Maintenance contracts will be lucrative, and Brazil could eventually buy more than 100 aircraft.
Boeing is willing to provide "any additional information" regarding its bid, company spokesperson Marcia Costley said in an e-mailed statement.
"We stand ready to discuss our proposal with the new administration, who will be responsible for the success or failure of this high-visibility acquisition and deserves to understand how it will be managed and implemented over the next decade," Costley said.
Saab spokesman Erik Magni said the company was unaware of any changes to the bidding process but was encouraged by the recent change in administration.
"Hopefully (Rousseff) comes in with more of a clean slate -- has another way of looking at it than the previous president. That can be positive for us," Magni said.
French defence sources told Reuters they had heard preliminary indications that there would be an overhaul of the bidding process under Rousseff.
The sale is especially critical for Dassault because it would be the first export order for the multi-role Rafale. The family-owned company's defence exports have been under pressure for several years as it struggles to repeat the success of the previous generation of Mirage warplanes.
As recently as January 4, French Defence Minister Alain Juppe said negotiations were "on the right track" with Brazil.
One factor that may work in Boeing's favour going forward is a shift in Brazil's relationship with the United States.
Lula's close relationship with Iran, and his unsuccessful attempt to mediate an international dispute over that country's nuclear program resulted in a chill in ties between Brasilia and Washington that spilt over into trade.
However, advisers say Rousseff is eager to improve relations with Washington, which she sees a potential commercial ally at a time of global financial uncertainty and growing strains with China over Beijing's trade policies.
Additional reporting by Raymond Colitt, Tim Hepher in Paris and Anna Ringstrom in Stockholm; Editing by Todd Benson, Kieran Murray and Sandra Maler