Israel has begun discussions with China in an effort to resolve the dispute stemming from the cancellation of the Phalcon spy plane deal last year, reported Haaretz newspaper on Monday.
But an Israeli diplomatic source said that the two sides were currently no closer to an agreement.
One of the main sticking points is the fact that China has already paid Israel tens of millions of dollars for the planes.
The deal, which included the installation of a Phalcon early warning radar on a Russian-built aircraft by Israel Aircraft Industries, was scrapped last year following intense pressure from Washington.
The Americans emphasized their strategic concerns regarding the transfer of sensitive defense technology to Beijing, and stressed the threat posed to Taiwan's security by putting the Phalcon system into Chinese hands.
Then prime minister Ehud Barak accordingly informed Chinese President Jiang Zemin of the decision to "freeze" the deal, but at the time, both the Israeli Defense Ministry and Israel Aircraft Industries still hoped that a solution could be found to the problem, the paper added.
About three weeks ago, however, the government apparently gave up hope, the paper noted.
Israeli Prime Minister Ariel Sharon sent an official message to the Chinese leadership informing them that the agreement was being canceled. The message was prepared by the defense ministry and was delivered by a senior defense official.
In an effort to soften the blow, Foreign Minister Shimon Peres and Finance Minister Silvan Shalom have agreed that Israel will establish a model farm for desert agriculture in southern China, as a sign of Israel's good will and desire to resolve to the Phalcon dispute.
Peres was honorary president of the Israel-China friendship association, and his books have been translated into Chinese - Albawaba.com
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