The governments of the two countries signed a memorandum of understanding aimed at establishing a greater partnership in modernising the Saudi Arabian Armed Forces and developing close service-to-service contacts, especially through joint training and exercises, the ministry said in a statement.

The British government recognizes "Saudi Arabia's efforts to develop a regional defence industrial centre of excellence," it said.

As prime contractor, BAE will invest in local Saudi companies, develop an industrial technology transfer plan, and provide suitable training for thousands of Saudi nationals, the ministry added.

Under the document, the European fighter aircraft Typhoon, which is largely manufactured by BAE, will replace Tornado Air Defence Variant aircraft and others currently in service with the Saudi air force.

The details of these arrangements are confidential between the two governments, the statement said.

"This (Document of) Understanding is good news for both UK and Saudi industry. BAE Systems, as prime contractor, and its many UK sub-contractors will benefit from the work envisaged under this Understanding, which will help sustain several thousand UK jobs over the next 10 years," Defence Secretary John Reid said in the statement.

In addition, the associated technology transfer, training and inward investment packages will generate many skilled jobs in Saudi Arabia, he added.

In London trading, shares in BAE Systems topped the FTSE 100 index, soaring 6.40 percent to close at 370 pence after confirming reports that the group was set to agree a valuable jet contract with Saudi Arabia.

The deal reportedly involved the purchase of 48 Eurofighter Typhoon jets, with an option to raise that to 72.

The Eurofighter Typhoon is produced by a European consortium comprised by the European Aeronautic Defence and Space Company (46 percent), BAE Systems (33 percent) and Alenia/Finmeccanica (21 percent) of Italy.

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