EADS, the parent company of Airbus which had teamed up with Northrop Grumman to win the 35-billion-dollar contract earlier this year, saw the deal as a key plank in efforts to break into the US military market.

Wednesday's ruling could wrest the contract from Northrop Grumman and partner EADS in a battle fraught with protectionist overtones in the United States.

"Our review of the record led us to conclude that the Air Force had made a number of significant errors that could have affected the outcome of what was a close competition between Boeing and Northrop Grumman," said the Government Accountability Office, the watchdog arm of the US Congress.

The recommendations of the powerful Congressional investigative arm, although non-binding, are usually heeded.

EADS said it was disappointed by the news and but still believed that its plane represented the best on offer.

"Though we're disappointed, it's important to recognize that the ... announcement is an evaluation of the selection process, not the merits of the aircraft," EADS chief executive Louis Gallois said.

"We will support our partner Northrop Grumman and remain confident that the KC-45 is the aircraft best suited to meet the Air Force's critical mission requirements, as demonstrated by four previous competitive selections."

Analysts said the news would hit EADS, the parent company of Airbus, as it seeks to gain access to the key US military market but the reaction should not be overdone until the situation becomes clearer.

"Psychologically, certainly there will be a reaction," said Yan Derocles, an analyst with Oddo Securities.

At the same time, Derocles said the decision in effect "brings us back to the status quo" before the contract.

For analysts at investment bank Natixis, however, "any opening to continued hostitilies with Boeing will be badly perceived."

The tanker contract was seen as a key turning point for EADS, gaining access to the US military market, the world's largest, after a hotly-contested fight with arch rival Boeing.

EADS has been targeting expansion into the North American markets generally to give it a manufacturing base in the dollar zone since it has suffered from the weakness of the US currency given its costs are in the much stronger euro.

On winning the tanker contract, EADS planned to move assembly of the cargo version of the A330 to Mobile in Alabama state.

"In terms of dollarisation effect, the impact could be significant in the medium-term," noted Derocles.

Boeing welcomed the announcement while Northrop Grumman insisted it had offered the military the best tanker but said it would review the GAO findings before commenting further.

The US Air Force said it would respond to the report later.

The GAO said the Air Force did not respect the evaluation criteria, conducted "misleading" discussions with Boeing about its compliance with requirements and gave too much slack to Northrop Grumman on some points.

It also said the Air Force made "unreasonable" cost calculations that, when corrected, fixed Boeing as the lower bidder over the life of the contract.

"We recommended that the Air Force reopen discussions with the offerors, obtain revised proposals, re-evaluate the revised proposals, and make a new source selection decision, consistent with our decision," the GAO said.

"We further recommended that, if the Air Force believed that the solicitation, as reasonably interpreted, does not adequately state its needs, the agency should amend the solicitation prior to conducting further discussions with the offerors."

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