We are pleased to see that they have taken our security concerns into account in making the decisions

State Dept spokesman Joe Lockhart

Announcing the decision, Israeli spokesman Gadi Baltiansky said it had been taken against "the background of American objections".

"Israel will not do anything to harm the United States," he added, declining to comment when asked if Israel had caved in to US pressure.

Track and target

The advanced Phalcon system was to have been installed in Russian-built Ilyushin-76 aircraft.

Phalcon facts

Mounted on fuselage or on top of aircraft Can be fitted on a range of planes Provides full 360� coverage Can detect low-flying objects hundreds of miles away Works day or night, in all weathers Faster and more accurate than conventional radar

Phalcon allows military planners to simultaneously track and target large numbers of aircraft and other targets from an airborne command post.

US defence officials had warned that the system would dramatically alter the regional strategic balance in China's favour in the event of any regional conflict.

There was also concern that the equipment could eventually enable Chinese forces to threaten US ships if Washington ever went to Taiwan's defence.

'Goodwill gesture'

Speaking in Jerusalem, Israeli Government spokesman Moshe Fogel said reports from the Israeli embassy in Washington had made it clear that the deal simply had to be scrapped.

The reports, he said, indicated that the row over the Phalcon system had begun to challenge several key assumptions regarding Israel's relationship with the US and its Jewish community.

US presidential spokesman Joe Lockhart welcomed the decision, saying US security concerns had been taken into account.

He also said the United States would not compensate Israel for its financial setback.

Another US official at Camp David described the move as "a goodwill gesture".

Correspondents say the airborne radar deal appears to have been a necessary casualty of the peace process and Israel's need to strengthen its hand on other issues on the table at Camp David.

China and Israel only established diplomatic ties in 1992, although military co-operation is believed to have begun secretly at least a decade earlier.