The new trainer will is expected to be selected in a few months to replace Israel's venerable A-4 Skyhawks.
These were first acquired in 1967 and saw combat in several Middle East wars. The small jet's agility and versatility, along with its ability to take heavy damage in combat made it a much-loved aircraft among Israeli air force pilots.
Israel's Globes business daily says that Elbit, which specializes in defense electronics, and state-run IAI, the flagship of Israel's defense industry, will establish a joint company which will buy and maintain the training aircraft.
The air force will pay the joint company for use of the aircraft in its pilot training program.
Globes reported that the director general of Israel's Antitrust Authority, Ronit Khan, has approved the Elbit-IAI collaboration.
The joint venture has emerged amid an emerging shake-up in Israel's defense industry, with the government leaning toward a possible merger of IAI, Rafael Advanced Defense Systems and Israel Military Industries.
In February, Elbit Systems announced it would buy 30 percent of Elisra Electronic Systems shares held by IAI for $67.5 million, making Elisra a wholly owned subsidiary.
Elisra develops electronic warfare, intelligence and command-and-control systems in association with Tadiran Electronics and Tadiran Spectralink.
The air force is in the final stages of choosing between two training aircraft, the supersonic T-50 Golden Eagle built by South Korea's Korean Aerospace Industries and Lockheed Martin Corp. of the United States, and the transonic M-346 produced by Alenia Aermacchi of Italy.
The initial order of 20-30 training jets will mark the first time in 40 years that the Israeli air force will buy jet aircraft not manufactured in the United States.
The T-50 offers the highest potential performance of the two as it can function as an "F-16 Lite." A T-50 with a light ground attack capabilities would be an added bonus for the Israelis.
The South Korean single-engine jet is considered to be one of the best training aircraft in the world.
The Israeli air force sent a team to KAI headquarters in Sacheon in 2009 to test-fly and evaluate the T-50, while others flew the M-346. No results of the test flights have been disclosed.
However, the Defense Industry Daily observed that the performance profile and ordnance-carrying capability of the M-346, similar to the Russian Yak-130, "in a pinch is probably the closest to the Skyhawk's."
The Jerusalem Post recently reported that closure of the trainer deal had been delayed because of budgetary problems, particularly the deal to buy 20 Lockheed Martin F-35 stealth fighter aircraft approved by Defense Minister Ehud Barak in August.
"Therefore, instead of paying for the aircraft, the Defense Ministry has decided to go with a proposal from Elbit Systems and Israel Aerospace Industries, which will purchase the trainers and subsequently lease flight hours to the (Israeli air force)," the newspaper noted.
The air force decided in October 2008 to retire its 200-plus A-4s. A senior officer explained: "The plane's old and we're discovering problems.
"Because of its age we're finding ourselves investing a lot of attention and resources and therefore we've started the process of searching for a new plane to replace the Skyhawk."
Many of the jets were already in storage and some have been sold to private operators. The air force maintains 102 Squadron, known as the "Flying Tigers," at Hatzerim Air Base equipped with A-4Ns and two-seat TA-4Js for advanced fighter training.
The A-4 was superseded as a frontline ground attack fighter with the advent of Lockheed Martin's F-16 Fighting Falcon, a multi-role aircraft originally developed by General Dynamics, in the 1980s.
In the late 1960s and 70s, the Skyhawk was the Israeli air force's primary ground-attack jet, It saw heavy combat in the 1967-70 War of Attrition with Egypt, a limited conflict that was spawned by the Israeli victory in the Six Day War of June 1967.
Skyhawks were heavily used in the October 1973 war when Israel fought off surprise attacks by Egypt and Syria and was nearly overwhelmed. Of the 201 air force aircraft lost, mainly to surface-to-air missiles, 53 were A-4s.