The UAE has quit talks to buy Eurofighter Typhoon aircraft in a deal worth $9.8 billion, said BAE Systems, a UK-based a defence and aerospace company, adding that it has not yet reached a final agreement with Saudi Arabia over a jet deal.

Fighter jet exports to regions such as the Middle East have become increasingly important to defence contractors such as BAE which are facing declining military spending from their biggest customers in the U.S. and Europe.

The company had been in discussions with the UAE about a deal possibly worth around GBP6 billion ($9.82 billion) for months, but it said in an update on Thursday that it had seen the risk of not winning a contract as high, so had not factored a win into its financial projections.

BAE's chief executive Ian King said in August that winning the UAE deal could be a "major game changer" for the company and the order, along with other potential orders from Saudi, could help stretch its Typhoon production line by four years to 2022.

BAE added on Thursday that it was still in talks with the government of Saudi Arabia over pricing of Typhoon jets, the continued delay of the so-called "Salaam deal" has pushed BAE to repeatedly trim its full year earnings forecasts. The Gulf state agreed to buy 72 Eurofighter jets in 2007 for 4.43 billion pounds at the time.

"Whilst good progress has been made, a definitive agreement has yet to be reached. A timely agreement in the new year would be reflected in trading for 2013," BAE said.

The company said in October that should the Saudi deal fail to be completed this year, it could hit its earnings per share by 6-7 pence for 2013.

"The combined news is certainly negative for BAE as we think some investors expected UK PLC to deliver a UAE contract, especially after PM David Cameron visited for the Dubai Airshow," RBC Capital Markets analyst Rob Stallard said.

"But Salaam could potentially prove the more worrying piece of news as its continued delay may spook investors into worrying that negotiations are not achieving any real progress."

RAFALE PROSPECTS

Speculation that the UAE would pick the Eurofighter consortium, made up by BAE, EADS and Finmeccanica , to supply at least 60 aircraft to replace its ageing Mirage fleet mounted after British Prime Minister David Cameron visited the Dubai Airshow to urge the region's leaders to buy the aircraft last month.

"This was a commercial decision. It was always going to be a difficult deal to do. And as BAE have said, it was an exciting prospect but not part of their business plan, a British government spokesperson said.

"We continue to have a strong bilateral relationship with UAE that delivers jobs and growth in both countries."

The UAE was choosing between the Eurofighter and France's Dassault Aviation Rafale aircraft for the order.

The decision provides a possible lift to the export prospects of France's Rafale, twenty-four hours after the plane was rejected along with Boeing's F/A-18 in a competition to supply fighters to Brazil.

Dassault Aviation had been seen as the leading contender to win the UAE contract until it was publicly criticized by Abu Dhabi over the Rafale aircraft's price two years ago. The UAE subsequently opened negotiations with the Eurofighter consortium, but a Gulf source said last month that other suppliers were "pushing" for a deal.

Besides France's Dassault, Boeing's F-15 is also in contention, the source said.

A spokesman for Dassault was not immediately available for comment. – Reuters