The Times of London said the talks concerned the Typhoon war planes and the prospect of acquiring 24 jets from Britain.
The previous Labor government suspended arms exports to the military-dominated regime in Jakarta in 1991 after allegations surfaced that they were being used for external aggression and internal repression. One such accusation spoke of Jakarta's use of British bombs to attack civilians 11 years ago.
The Times reported that the sale could fetch more than $8 billion for Indonesia but would be "hugely controversial in light of current concern over the sources of weapons being used against Arab rebels."
The Typhoon is a twin-engine, canard-delta wing, multi-role jet designed and built by Britain's BAE Systems in conjunction with Alenia Aeronautica and EADS.
Each partner company assembles its own national aircraft but builds the same parts for all aircraft, including exports. A separates assembly line is being established for the production of 48 Typhoons in Saudi Arabia.
Britain is the second largest supplier of armaments after the United States. British Aerospace, the United Kingdom's largest defense contractors, has also sold Rapier air defense missiles to Indonesia.
It has also supplied Jakarta with a fleet of Hawk jets, capable of attacking targets on the ground while no match for sophisticated enemy aircraft.
The Times said that British Defense Minister Gerald Howarth would discuss details of the sale when he visits Jakarta this month to attend a defense meeting.
"I fully expect that to be the case," Howarth told the paper. "Typhoon is on their agenda. Their interest shows the extent of interest by countries around the world in what is one of the most sophisticated aircraft anywhere."
Other British newspapers have linked Prince Andrew to the sale. He visited Jakarta in March 2008 as part of his international ongoing visits program working on behalf of U.K. Trade and Investment, the government's export promotion body.
"We are unaware that Indonesia wants or need fighter jets," said U.K. Trade and Investment in a statement, responding to the press allegations. "We have very strict export licenses and anything like that would have to go through proper procedures."
International human rights groups have lambasted Indonesia for rights violations including police torture and a restricted media.
"With such a dreadful record, BAE and the British government should not be trying to sell more weapons to Indonesia," Amnesty International said recently.