The Yediot Ahronot newspaper said the problems arose from the failure of Israeli Prime Minister Binyamin Netanyahu's right-wing government to move forward on peace negotiations with the Palestinians.
Udi Shani, director general of the Israeli Defense Ministry, refused to confirm or deny there were problems about the submarine deal.
"It's a very complicated, very sensitive file that's under discussion," he said Wednesday. "There are many parameters that have to be taken into account."
German Chancellor Angela Merkel reportedly strongly criticized Netanyahu during a telephone conversation in September. She said she had "absolutely no understanding" of the Israeli government's decision to increase settlement building in East Jerusalem, the former Arab sector of the holy city captured by Israel in 1967.
Germany has for decades sought to accommodate Israel in atonement for the Holocaust during the Nazi era but this has been wearing thin for some time, particularly because of the global economic downturn of recent years.
German opposition parties complain about exporting arms to regions in crisis, such as the Middle East.
The problem may have something to do with Netanyahu's request that Berlin pay one-third of the $500 million-$700 million cost of the advanced submarine.
Netanyahu's coalition approved significant cuts in the defense budget in September and this may have intensified the government's efforts to convince Germany to defray much of the cost of the sixth submarine.
The German newsmagazine Der Spiegel reported in July that the Berlin government had agreed to pay $189.5 million of the cost. It said the deal would be finalized within weeks but that hasn't happened.
Israel initially bought three of the heavily modified diesel-electric Type-209 submarines, which it designated the Dolphin class, built by the Howaldtswerke-Deutsche Werft AG shipyards in Kiel, in the late 1990s. The Germans donated two and Israel paid $350 million, half the cost, for the third.
HDW is owned by ThyssenKrupp Marine Systems.
In 2006, Israel ordered two more Dolphins, with the Germans picking up one-third of the total cost of $1.27 billion.
Unlike the first batch, which have to surface frequently to recharge batteries, the second batch are upgraded models with an air-independent propulsion system, based on technology that allows for silent running plus a fuel cell equipped with oxygen and hydrogen storage. HDW uses the technology in its U-212 submarine design.
These boats will also incorporate modifications specified by the Israeli navy, though these haven't been disclosed.
The original design was modified at Israel's request with 533mm torpedo tubes capable of firing U.S.-supplied Harpoon missiles.
The Federation of American Scientists and GlobalSecurity.org report that four 648mm tubes can launch nuclear-armed Popeye Turbo cruise missiles with a range of 930 miles.
The two subs under construction are expected to be delivered in 2012-13. All the boats have a reported operating range of 2,800 miles.
It is believed that the Israelis want to maintain a permanent deployment of one or two Dolphins in the Red Sea-Arabian Sea region.
This is to hit strategic targets in Iran, in conjunction with Israeli airstrikes, if conflict erupts over Tehran's reported drive to develop nuclear weapons, and to give the Jewish state an added second strike capability if it comes under attack from Iranian ballistic missiles armed with nuclear warheads.
There had been talk of Israel also ordering two MEKO-derived frigates to bolster its surface fleet but budgetary constraints, even before September's cutbacks on military spending, led to scrapping that option.
The Dolphins are the most expensive military platforms used by Israel armed forces.
There have been differences within the Israeli defense establishment for some time about the need for a sixth Dolphin and presumably it's felt that five boats would be sufficient for their primary strategic mission.
Israel is the only Middle East power believed to have nuclear weapons and able to launch nuclear-tipped missiles from the air, land and under the sea.
Some analysts maintain that this capability by Israel only complicates efforts to convince Iran it should abandon its alleged drive to acquire nuclear weapons. Israel sees a nuclear-armed existential threat.
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