The Ministry of Defence’s export agency, which negotiates and promotes billions of pounds of foreign arms sales, faces cuts to its annual budget of £10m, raising questions over its future.

The doubts over the role of the Defence Exports Services Organisation come as the MoD is wrestling with the fallout from corruption allegations related to the 20-year-old BAE Al-Yamamah arms deal with Saudi Arabia.

Deso has played a key role in the deal and its likely successor, a £10bn contract to supply 72 Eurofighter combat jets to the Saudi air force.

Government and industry sources said the Foreign Office was proposing to cut £10m of yearly funding to the MoD used to pay for foreign “defence attachés”, as part of the comprehensive spending review. Attaches are used by the MoD to promote arms sales.

A Foreign Office official said: “We believe the defence attaché network effectively serves MoD objectives rather than strategic international priorities.”

Industry executives have raised concerns with the MoD that the UK is in danger of losing its position as a leading arms exporter if Deso is curtailed or scrapped. Britain captures about 20 per cent of global arms exports, principally through Saudi sales, but market share is under pressure as France, Israel, Russia and the US step up overseas campaigns.

The MoD, which spends £15m a year on Deso, has embarked on a review of the agency though the findings have not been publicised.

Industry executives are worried that, after a benign 10-year relationship with Tony Blair on exports, including his decision to halt a Serious Fraud Office investigation into Al-Yamamah, Gordon Brown will adopt a far less supportive approach as prime minister and revive ideas of an ethical foreign policy.

Figures from the Society of British Aerospace Companies, the industry trade body, showed arms exports accounted for almost a quarter of the sector’s sales, only slightly less than domestic MoD sales. The industry, led by BAE Systems, the country’s biggest arms manufacturer, argues that without extensive arms sales the domestic industry would decline, leaving the UK unable to manufacture its own weapons.

However, the MoD is struggling to pay for an over-ambitious military equipment programme and will find it difficult to provide funds for Deso.

Deso is controversial because of its open ties to industry. Alan Garwood, its current head, is seconded from MBDA, a missile maker part-owned by BAE. He has been tipped to return to BAE as marketing director.

The agency has traditionally paid for foreign delegates to attend the Farnborough Air Show, an opportunity for local arms manufacturers to display their wares. However, next year it is understood the industry will instead foot the bill for international delegates.

According to Foreign Office officials, 30 per cent of the cost of defence attachés overseas is only “notionally” spent on key objectives of diplomacy and conflict resolution.

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