Israel is to buy Italy's M-346 Master advanced jet trainer for its air force, with the Italian plane beating South Korea's T-50 Golden Eagle after a hotly contested competition for the $1 billion contract.

Italy's Alenia Aermacchi clinched the deal for 30 combat trainers even though Seoul had dangled an offer to buy Rafael Advanced Defense Systems' ground-breaking Iron Dome counter-rocket system and other Israel-made military hardware.

The T-50 was jointly developed by Korea Aerospace Industries with Lockheed Martin of the United States.

The Italians, says IsraelDefense Web site, offered to buy two to four early warning aircraft built by state-run Israel Aerospace Industries as well as other Israel defense products.

"The Italian proposal was surprising due to its scope, which may reach as much as $1 billion," IsraelDefense noted.

Defense sources said it will also likely include joint development of a new surveillance satellite with state-owned Israel Aerospace Industries, the Jewish state's main satellite manufacturer.

Satellite components are provided by a score of other companies such as electronics major Elbit Systems.

The bargaining over reciprocal deals underlined a new trend in defense deals between countries with high-profile defense industries.

For such countries, defense exports have become paramount as the global arms market is shrinking because of major financial cuts in defense budgets by the United States and Europe, largely because of the worldwide economic meltdown.

The Israeli business daily Globes reported that negotiations on the trainer deal "have been extremely tense, especially because of suspicions by KAI executives that Israel had opted for the Italian plane a long time ago."

"The decision is expected to lead to a crisis with South Korea, which had pushed hard to win the deal," observed Yaakov Katz, defense analyst with The Jerusalem Post.

"Seoul has claimed that Israel favored Italy throughout the competition and that the tender was not conducted according to 'international standards'."

Seoul alleged that Israel was unfairly favoring Alenia Aermacchi, a subsidiary of the Italian defense and aerospace giant Finmeccanica, by initialing a preliminary agreement to acquire the M-346.

Haaretz reported at the time that such an arrangement had been signed and that it involved "a wide-ranging trade deal."

Given Italy's grievous economic woes, Alenia Aermacchi could possibly run into problems meeting the spending commitments it made to secure the M-346 contract.

The Israeli Defense Ministry didn't address that aspect of the deal but Globes reported the "defense establishment said the officials responsible for the deal were well aware of Italy's shaky economic conditions and that measures for dealing with this have already been coordinated with the Ministry of Finance to prepare a package of guarantees for reciprocal procurements."

The M-346 decision must be approved by the government of Israeli Prime Minister Binyamin Netanyahu, which is locked in a bitter dispute with the ministry over heavy cutbacks in military spending.

The deal, however, isn't expected to hit any roadblocks. The Haaretz daily quoted military sources as saying that given the defense establishment's "difficult budgetary situation," the Italian inducements in the M-246 deal were a crucial factor in the Israeli decision.

Udi Shani, director general of the Defense Ministry, said, "This offset deal is extremely important due to the current harsh budgetary reality in which the defense establishment is operating."

Israeli air force officers have said there is little to choose between the M-346 and the T-50, built by state-owned KAI.

But the Defense Ministry insisted the selection was based primarily on the M-346's capabilities, following dozens of test flights using both aircraft, and was "preferable in terms of the (Israeli air force's) needs and requirements."

"The Italian plane is also cheaper to operate and maintain," Haaretz reported. "But ministry officials acknowledged that South Korea's much less generous reciprocal purchasing offer played a part."

The M-346 will replace the Israeli air force's Douglas A-4 Skyhawk, a strike jet whose heyday was during the Vietnam War and has been used to train pilots for supersonic combat.

Israel began acquiring its fleet of 200-plus A-4s in 1967. The Skyhawk was the first fighter jet the United States agreed to sell Israel.

The first batch of M-346s is expected to be delivered in 2014.