Geoff Hoon has clashed with Ministry of Defence officials over a multi-billion pound contract for Hawk jets, after rejecting their confidential advice that awarding BAE Systems the order would waste taxpayers' money and leave the government with a cost overrun of £1 8bn.

The row has delayed an announcement about the jets and comes at a sensitive time for the defence secretary, who is battling for his political life over his role in the unmasking of David Kelly, the source of a controversial BBC broadcast on Iraq.

A secret MoD paper written by civil servants in recent days warns Mr Hoon that officials will not endorse his preferred option of selecting BAE to make 31 Hawk "advanced training" jets.

It makes clear that the government would be faced with a budget shortfall of £1,8bn if BAE is chosen to supply the jets, known as Hawk 128s. It argues that inviting other companies to bid would save the taxpayer money.

The document, by an unnamed official, concludes that to ask for competitive bids "remains the best overall value for money solution to the AJT [Advanced Jet Trainer] requirements.

It offers potentially greater capability at a lower price*.

Any other approach involving Hawk will require a direction to my permanent secretary on value for money*."

Such a ministerial "direction" to civil servants is highly unusual*.

As culture secretary in 2000, Chris Smith ordered a senior civil servant to pay £76m to keep the Millennium Dome afloat, even though officials told him it was a waste of public money. Since becoming defence secretary nearly four years ago, Mr Hoon has disagreed with officials at least once before, over a contract to supply ferries.

But the defence secretary is determined to back BAE's Hawk bid, sympathising with union claims that 2 500 jobs would be lost at the company's Brough plant on Humberside if the jets were made by a foreign rival.

On Friday night an MoD insider defended Mr Hoon, saying that he had been forced to come to his own decision because officials could not agree among themselves.

Senior civil servants were "relaxed" about being overruled by the defence secretary over cost concerns, he said, adding "Officials at the Defence Procurement Agency have been unable to reach a consensus about the best way forward. They've asked Mr Hoon to make his own judgment with the prime minister and senior colleagues."

The controversy could not have come at a more difficult time for the defence secretary. But if he manages to persuade the prime minister to hand the contract to BAE, he would receive a much-needed boost from Labour and union colleagues.

One Labour insider said he would become a "hero" of the unions.

"If Hoon delivers Hawk he will massively bolster his position among Labour MPs, trade unions and senior industrialists," he added.

The prime minister is under pressure to announce his verdict before his holiday in August.

The MoD paper sets out a compromise proposal, under which an older jet, the Hawk 115, would be used initially, with other firms given the chance to bid to supply the newer model in a few years' time.

But within the past 24 hours, such a compromise has become increasingly unlikely, after the RAF raised objections.

The MoD insider said the choice before the prime minister was "Hawk 128 or a competition, and Hoon is arguing for Hawk 128*.

There's no third way**." 

* Deja vu.

** There's Hoon's Way and Modise's Way - these ways are identical to each other and with BAE Systems's way.

With acknowledgements to Cathy Newman and the Financial Times, London.