"BAE Systems has been notified by the US Department of Justice that it has commenced a formal investigation relating to the company's compliance with anti-corruption laws including the company's business concerning the Kingdom of Saudi Arabia," it said in a brief statement to the London Stock Exchange.

BAE Systems is alleged to have set up a 60-million-pound (89-million-euro, 120-million-dollar) "slush fund" for members of the Saudi royal family to secure business, and made illegal payments to those involved in its deals.

BAE strenuously denies the charges.

Britain's Serious Fraud Office (SFO) had been investigating BAE Systems' 43-billion-pound Al-Yamamah deal in 1985, which provided Hawk and Tornado jets plus other military equipment to Saudi Arabia.

But the investigation was shelved by the British government in December in a move supported by outgoing Prime Minister Tony Blair amid concerns over Britain's national interests.

The probe comes at a crucial time for BAE Systems after it won US regulatory approval last week for a takeover of US defence group Armor Holdings in a deal worth 4.5 billion dollars.

Analysts said the US probe could affect BAE's agreed purchase of Armor Holdings, which manufactures armored vehicles and other equipment for the US military and law enforcement.

BAE wants to boost its growing operations in the United States, one of the world's largest defence markets.

A BAE company spokesman declined to comment on the substance of the formal US investigation, but he added: "The company is committed to meeting the highest ethical standards in its dealings with others, and doesn't tolerate unethical behaviour or attempts to improperly influence decisions for customers."

The US DoJ confirmed the investigation but refused to comment further in Washington.

The Guardian newspaper in Britain has alleged that BAE secretly transferred more than one billion dollars to accounts controlled by Prince Bandar, who was at the time Saudi Arabia's ambassador to Washington.

The center-left daily has also alleged that BAE bought the prince a top-of-the-range Airbus airliner worth 75 million pounds and was still paying the costs of flying it.

Both the prince and BAE have denied any charges of wrong-doing.

The Organisation for Economic Cooperation and Development (OECD), which coordinates policies and advises member countries on governance, has voiced "serious concerns" about the dropping of the SFO corruption probe into BAE's sales in Saudi Arabia.

A British govenrment spokesman was asked on Tuesday whether Blair had any regrets about the SFO investigation being closed and a new inquiry being opened in the United States.

He told reporters: "I have no comment to make whatsoever. Our position on the investigation in this country hasn't changed. We have no comment to make on the inquiry in the States."

He also said he had no comment to make when asked if British officials were ready and willing to co-operate with the US authorities.

BAE contracts are still being investigated by British justice officials in Africa, eastern Europe and South America.

Earlier this month, meanwhile, BAE set up an independent committee to evaluate the firm's business practices and ensure they abide by the highest ethical standards.

But Lord Harry Woolf, a retired judge heading the committee, and BAE chairman Dick Olver have suggested the panel would not examine media allegations of impropriety surrounding the Saudi deal.

Related Links
British Serious Fraud Office
The Military Industrial Complex at SpaceWar.com
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