Embarrassment as U.S. probes '£1bn arms bribe'

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The U.S. Department of Justice is to probe alleged £1billion bribes by defence giant BAE Systems to Prince Bandar of Saudi Arabia.

Its inquiry is a blow to the Government, which has been desperate to close down controversy over the affair.

The incoming Prime Minister and his new Defence Secretary will now have to decide whether to co-operate with the U.S. investigation, which could lead to a criminal inquiry under America's Foreign Corrupt Practices Act.

BAE has repeatedly denied doing anything wrong and Prince Bandar has categorically denied receiving any bribes.

But the Government has faced growing pressure since the Serious Fraud Office was ordered to drop its inquiry into the Al-Yamamah contract last year on the grounds of national security.

The U.S. inquiry will also be a huge embarrassment to President George Bush, who had a close relationship with Prince Bandar when he was ambassador to Washington during the first five years of the Bush administration.

The president trusted Prince Bandar as his primary source of information on many Middle Eastern situations.

In the first days following the 9/11 terrorist attacks on New York and Washington, Prince Bandar sent his private jetliner all over the U.S. to pick up two dozen members of Osama bin Laden's family.

Now that the president's own Justice Department is investigating the alleged fraud, opposition Democrats are certain to use the relationship as another example of what they claim is the president's bad judgment.