On Aug. 31, Egypt's leading newspaper, al-Ahram, quoted navy commander Rear Adm. Osama Ahmed el-Gindi as saying the German government had agreed to sell two Type 209 diesel-electric attack submarines produced by Howaldtswerke-Deutsche Werft AG of Kiel, the main supplier of submarines to the German navy.
Berlin has remained tight-lipped about Gindi's disclosure, which triggered angry protests in Israel, particularly amid the rise of an Islamist government in Cairo following the February 2011 fall of President Hosni Mubarak in a pro-democracy uprising.
Egypt's new president, Mohammed Morsi, a former leader of the once-outlawed Muslim Brotherhood, has indicated his objections to Israel's 1979 peace treaty with Israel and reportedly seeks to negotiate major revisions amid growing tensions in the Sinai Peninsula.
The mass-circulation Israeli daily Yediot Ahronot quoted unidentified government sources as warning the reported submarine sale to Egypt has caused "a dramatic deterioration in the relationship" between Israel and Germany.
Berlin denied there was any rupture.
Government spokesman Steffen Seibert, speaking at a briefing in Berlin, indirectly confirmed the Egyptian report.
"It has not changed the German attitude toward Israel or the obligation the German government has to ensure Israel's security," he said.
That commitment has been a cornerstone of Germany's foreign policy because of the Nazi Holocaust in World War II.
Seibert refused to be drawn out on details of the reported sale to Egypt, citing secrecy provisions of Germany's Federal Security Council, which must approve all arms exports.
The Israelis claim the Egyptian purchase would undermine the Jewish state's military supremacy in the region but observers see that assertion as exaggerated.
Israel, without doubt the major military power in the Middle East, has bought six Dolphin-class submarines -- based on the Type 209 design -- from Germany since the late 1990s. Three are in service, with the other three, more advanced boats scheduled for delivery by 2017.
Government sources told the Financial Times Deutschland the Israeli Dolphins are far more advanced than those to be sold to Egypt and delivered by 2016.
Germany paid the lion's share of the overall cost of the Dolphin sales to Israel, including more than one-third of the $1.8 billion price tag for the batch now being built, as well as giving Israel until 2015 to pay its share.
When all six boats are operational, Israel will have the most powerful submarine arm in the Middle East.
The Dolphins have reputedly added a third dimension to the Jewish state's nuclear attack capability, currently based on the country's air and land missile forces.
Egypt's small navy has four aging Chinese-built Romeo-class Project 633 submarines acquired in the 1970s. These were to have been replaced years ago but financial constraints delayed the move.
If the sale to Egypt goes ahead, it will provide a big boost for Berlin's expanding arms export program and its broadening foreign policy, underlining how defense exports have assumed a new importance for the industrial powers amid shrinking defense budgets.
Germany's coalition government under Chancellor Angela Merkel has been quietly easing restrictions for some time but has come under growing domestic criticism, with opposition Green Party leader Claudia Roth denouncing the "deals with death."
But Germany's keen to hustle more arms sales in the Middle East that have long been dominated by the United States, Britain and France, with Russia pushing hard to build up its post-Soviet business.
Berlin is negotiating with Saudi Arabia for the sale of some 600 Leopard 2A7+ main battle tanks potentially worth $12.6 billion.
It's possible Merkel's seeking to emulate the United States, which sells weapons to both Israel and its Arab adversaries without qualms.
The German newsmagazine Der Spiegel recently observed that Merkel is "drawing lessons from Afghanistan and Libya ... Instead of intervening in conflicts, she wants to help arm certain countries to provide stability in crisis regions. But if history is any guide, the plan could backfire."
Qatar's eyeing the acquisition of 200 Leopards worth $2.5 billion. A team from Munich's Krauss-Maffei Wegmann recently flew to the emirate to discuss a possible deal.