Israel and South Korea are increasingly at odds over a $1 billion contract for the Israeli air force's new advanced jet trainer to replace its venerable A-4 Skyhawks, amid reports that Israel has already signed a preliminary deal with Italy to buy a rival aircraft.

How this dispute is resolved is likely to determine potentially lucrative Israeli defense contracts with one of the two countries.

The issue also underlines how exports have become the primary focus of defense companies around the globe to keep production lines running at a time when military budgets are been slashed in the West.

The Israeli Defense Ministry is expected to decide by early 2012 whether it's going to select Korea Aerospace Industries' T-50 Golden Eagle or the M-346 Master built by Alenia Aermacchi of Italy to replace the air force's fleet of Vietnam-era Douglas A-4s.

The Skyhawks, in service with Israel since 1967, are used for advanced training before pilots move on to supersonic combat aircraft like the Lockheed Martin F-16 and Boeing's F-15, backbone of Israel's air power.

Final selection of the new trainer reportedly has been delayed several times over the last year because of the Defense Ministry's "budgetary constraints."

Until recently, the T-50 looked like being the front-runner in the trainer competition.

But a few weeks ago, the Koreans recently complained that Israel had initialed a preliminary agreement with Italy, which if it goes ahead is expected to be part of what the Haaretz daily termed "a wide-ranging trade deal" between the two countries.

"The air force has examined the two competing planes and submitted detailed reports about them," the daily reported.

"The decision now rests with the ministry, and the deciding factor will apparently be the deal's economic ramifications."

Amos Harel, one of Israel's leading writers on military and defense issues, reported in Haaretz that six months ago Defense Ministry Director-General Udi Shani had indeed inked a preliminary deal with his Italian counterpart.

"The document, which was formulated according to demands submitted by Israel, expanded the deal beyond its original framework," Harel observed.

Italy reportedly pledged that if Israel signed on the dotted line for Alenia Aermacci's M-346, "the two sides would sign additional deals worth more than $1 billion."

These would include joint development of satellite projects, probably involving state-owned Israel Aerospace Industries, and the sale of unmanned aerial vehicles, an Israeli speciality, to Italy.

The Jerusalem Post recently reported that the Rome government was discussing with the Israeli Defense Ministry about possibly making a barter deal with Italy, providing it with two AWACs aircraft from state-run Israel Aerospace Industries in exchange for the M-346.

The Koreans have indicated that if Israel buys the M-346, all military procurement deals between the Jewish state and South Korean would be scrapped.

Current defense deals between the two are worth some $280 million a year to Israel.

Seoul has been showing keen interest in acquiring the Iron Dome counter-rocket system built by Rafael Advanced Defense Systems and now operational with Israeli forces.

Israel is keen to export Iron Dome and other anti-missiles systems such as the high-altitude anti-ballistic Arrow developed by IAI, and the medium-range David's Sling system still being developed by Rafael.

Seoul announced in June it had signed a $43 million deal with Rafael for 67 Spike NLOS missiles to boost defenses on the Yellow Sea islands of Baengnyeong and Yeonpyuong attacked by North Korea in 2010.

A South Korean delegation is currently in Israel for talks, the second such delegation in recent weeks. The director of the Israeli Defense Ministry's acquisitions division, Shmuel Tzuker, earlier visited Seoul.

Once a new trainer has been chosen, IAI and Elbit Systems, a leading maker of military electronic equipment, will establish Tor Ltd. to handle the purchase and maintenance of the training aircraft, and lease the jets to the air force.

The single-engine T-50 is considered to be one of the best training aircraft in the world and by all accounts offers the higher potential performance of the two as it can function as an "F-16 Lite."

The M-346 and the T-50 can both be armed. But the Defense Industry daily observed recently that the Italian jet's performance profile and ordnance-carrying capability "in a pinch is probably the closest to the Skyhawk's."