The spat involves Israeli-made Harpy assault drones sold to China in the mid-1990s and returned to Israel for upgrading.

If Israeli authorities do not return the advanced weapons systems to China, they risk a diplomatic crisis with Beijing, Haaretz said.

The head of Israel's parliamentary defence committee, Yuval Steinitz, acknowledged last week that arms deals with China had provoked tensions with the Jewish state's top ally, the United States.

"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," he told Israeli radio.

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

US officials were furious at Israel for taking back a "sensitive weapons system" sold to China in the 1990s 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.

The issue has become a sensitive one after Israel in July 2000 cancelled a contract to sell 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 in compensation for cancelling the sale.

China had forked out a downpayment of 200 million dollars on a first plane, valued at 250 million dollars, and signed a contract which foresaw the purchase of four similar aircraft.

Washington based its demand on concerns that advanced US defence technology contained in Israeli equipment could be used against China's rival Taiwan, where US soldiers are deployed.

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