"There are tensions, which are hidden from the public, which have appeared over the last one or two years concerning Israeli weapons sales, particularly to China," Yuval Steinitz told Israeli radio.

His comments followed a report on Israel's private Channel Two television Wednesday that the Pentagon was demanding the dismissal of Israeli defence ministry director general Amos Yaron.

US officials are furious at Israel for taking back a "sensitive weapons system" from China for upgrading, the channel said, although it did not identify the weapon.

Washington had permitted Israel to take the system back from China for repair, but had not authorised it to be upgraded, according to the report.

Israel's ambassador to Washington, Danny Ayalon, denied Thursday that the United States had sought the dismissal of Yaron, saying "no demand of that nature was made".

"Questions were raised recently, but they are being examined in a good atmosphere," he said.

Defence Minister Shaul Mofaz also denied the accuracy of the report, while accepting that a dossier on Israeli weapons sales to China was "in the process of clarification".

The issue has become very sensitive after Israel in July 2000 cancelled a contract to sell to China a Russian Ilyushin-76 plane equipped with its own Phalcon Airborne Warning and Control Systems (AWACS).

In March 2001, Israel agreed to pay China 350 million dollars to compensate for the cancelled sale.

The United States justified its demand with fears that advanced US defence technology contained in Israeli equipment could be used against China's foe Taiwan.

"There has been a tightening of checks exercised by the United States on Israeli weapons exports and since the Phalcon matter we are very sensitive to US requirements," Steinitz said.

"Israel and France are the only countries which compete with the Americans in the advanced military technology sector," the parliamentary committee leader said.

"We must take account of US interests, but a demand for the dismissal of a person in charge such as Amos Yaron ... would be unacceptable," he added.

A source close to Prime Minister Ariel Sharon told AFP that "the whole thing had been a misunderstanding".

The row risks adding to an atmosphere of suspicion that has gripped relations between the Pentagon in recent months.

Sharon was forced in September to insist that Israel was not spying on the United States following allegations that a Pentagon official leaked intelligence to a pro-Israel lobby.

US officials alleged that Pentagon aide Larry Franklin passed secrets to Israel using the American Israeli Public Affairs Committee (AIPAC) as the conduit.

Franklin is an Iran specialist in the office of Undersecretary of Defense for Policy Douglas Feith, the third most senior civilian official at the Pentagon.

Israel pledged not to spy on Washington after the hugely embarrassing arrest of Jonathan Pollard, an intelligence analyst for the US navy, who passed on thousands of secret documents.

Pollard was sentenced to life imprisonment in 1987.

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