Israel's defense industry racked an unprecedented $7.2 billion in exports in 2010, up on the $6.9 billion achieved in 2009.

That put the Jewish state among the world's top four arms exporters but declining military budgets around the world are likely to reduce sales over the coming years.

"We recognize the challenges but we're working hard to maintain the level we're currently at and even to increase it," said Reserve Brig. Gen. Shmaya Avieli, head of the Defense Ministry's Foreign Defense Assistance and Defense Export Department.

The Israelis are hoping to secure big-ticket deals at the Paris Air Show, a major international defense industry showcase next week at the Le Bourget exhibition center.

Government figures indicate Israeli defense companies sold military hardware worth $9.6 billion in 2010, $2.4 billion of it to Israel's military.

But meantime, China, once a promising market for Israeli weapons and electronic systems, remains off-limits, largely because of Israel's ally, the United States.

The Americans blocked the sale of four $250 million Phalcon advanced early warnings aircraft to the People's Liberation Army in 2000, citing U.S. components used in the systems carried by the aircraft. Beijing was furious.

Israeli Defense Minister Ehud Barak, who sanctioned the Phalcon deal, is currently in Beijing, the first such visit in a decade.

Israeli officials, however, stressed the policy of no weapons sales to China is still in place.

In 2005, Israel agreed to upgrade Israeli Aerospace Industries unmanned aerial vehicles sold to Beijing in the 1990s. The United States responded by downgrading Israeli's participation in the F-35 Joint Strike Fighter program. The drone upgrade was scrapped.

The Americans remain uneasy about Israeli defense links to China, in particular about the Chengdu J-10, China's new air force fighter, which reputedly involves technology from the joint U.S.-Israeli Lavi fighter project of the 1980s.

The delta-winged Lavi, being developed by IAI, was canceled in 1987 under political pressure from Washington because of soaring costs.

The Americans, who provide Israel with $3 billion a year in military aid, were also reluctant to fund a project that would compete with Lockheed's F-16 Fighting Falcon, the leading U.S. fighter of the day.

Arieh Herzog, head of the Israeli Missile Defense Organization, said in May that Israel halted sensitive technology transfers to China in 2005 and created an office to oversee military exports.

Six years after the Pentagon blocked Israel from advanced military technology over concerns about leaks to China, Washington is once again funding Israeli high-profile air-defense missile systems development.

These focus mainly on IAI's Arrow high-altitude, long-range interceptor designed to down Iranian ballistic missiles and deployed in 2000, and the Iron Dome, intended to counter short range projectiles, which got its baptism of fire in March and April.

Iron Dome is being built by Rafael Advanced Defense Systems of Israel. The U.S. Congress authorized $205 million to support the Iron Dome program in early 2011.

India has expressed interest in the Arrow but given extensive funding provided by the United States, such sales might be problematical. In March, The Jerusalem Post reported that the Defense Ministry was discussing possible Iron Dome sales to European NATO states.

The system will be one of the main attractions in the Israeli pavilion at the Paris Air Show.

Another Israeli missile defense system, David's Sling, designed to counter medium range rockets and missiles, is currently being developed by Rafael in partnership with the U.S. Raytheon Corp.

Increasingly, Israel's defense industry is looking to the Third World for exports. Asia and Latin America, where several states' energy-fueled economies are taking off, have become prime targets, particularly since Israel's alliance with Turkey, a major arms market, collapsed in 2009.

But with defense markets generally shrinking following the global financial meltdown two years ago, and likely to be cut back further as oil prices rise again, the Israelis face growing competition from their key allies, the Americans.

U.S. arms makers are increasingly looking abroad for sales as the U.S. military budget is reduced.

U.S. defense contractors are expected to sell hardware worth a record $46.1 billion to foreign buyers in 2011. That's a nearly 50 percent hike from $31.6 billion in 2010 -- much of it to Israel's Arab adversaries.

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