By Luke Baker
LONDON, May 13 (Reuters) - Britain is expected to decide on Thursday that it remains committed to the Eurofighter defence contract, though it wants to trim some costs related to the multi-billion dollar programme, government sources say.
Talks involving Business Secretary Peter Mandelson and officials from the Ministry of Defence, the Treasury and the prime minister's office have concluded that cancelling the contract would have too much of an impact on jobs and Britain's reputation, as well as incurring fines of up to $1.5 billion.
While the decision is expected to be finalised on Thursday, it may not be announced immediately, the sources said.
Germany, one of the four nations involved in building the advanced jets along with Spain, Italy and Britain, wants to hear by the end of May whether Britain remains committed.
"Everything points to a decision being made by the end of the week, and most likely by Thursday," one government source close to the discussions told Reuters.
Two others said that the cost of getting out, not just financially but in terms of reputation and the economy -- up to 40,000 Britons are directly or indirectly employed by Eurofighter and related aerospace contracts -- made it very likely that the government would reiterate its commitment.
However, they said that the final decision would be made by Prime Minister Gordon Brown, a former finance minister who is not regarded as supportive of massive defence spending.
"This is a major strategic decision, so the prime minister has to be involved and is involved," one of the sources said.
One source said Britain's Attorney General, the chief government law officer, had advised the UK could be sued for damages if it pulled out. A spokeswoman declined to comment.
Britain has delayed for months over what to do with Eurofighter, concerned that the high cost of the programme, conceived nearly 25 years ago, was becoming unaffordable at a time of economic crisis and budget constraint.
Brown and German Chancellor Angela Merkel have held telephone talks on the issue in recent weeks as Germany has pressed Britain to make pending payments on the contract.
Under the original deal for the aircraft -- being built by Britain's BAE Systems, Italy's Finmeccanica and EADS for Germany and Spain -- Britain was obliged to buy 232 planes.
The majority are already in service, but the third tranche, which involves a further 88 aircraft for Britain and others for Spain, Germany and Italy, has yet to go into production.
That tranche has already been split into two parts, so that Britain is now obliged to pay for and take delivery of 40 aircraft, with the remainder set aside for future production.
Britain has weighed various methods of reducing its costs, including selling some of its allotment on to other countries or altering the finance schedules. Tinkering with the numbers may reduce the total cost by a small degree, but ultimately defence experts expect Britain to go ahead with the contract.
"We have a commitment to our partners, cancellation is costly, and tranche three is the one that the airforce really wants," said Keith Hartley, a defence economist.
"Eurofighter is central to Britain's aerospace industry. The costs may be high, but it's something Britain has a strength in and needs to stay committed to."
Defence sources last month that Britain had won agreement to take just 16 new aircraft out of its allotment, by allocating the other 24 to a recent export deal with Saudi Arabia. But it came under pressure from European partners after refusing to sign up to the agreement until it had reviewed the costs. (Additional reporting by Tim Hepher; Editing by Rupert Winchester)