London - BAE Systems, Britain's biggest defence contractor, has been accused of operating a multi-million dollar slush fund used to bribe Saudi officials involved in the trade of arms between the two countries, a London newspaper said on Thursday.

The Guardian reported on its front page that it had obtained a confidential letter from Britain's Serious Fraud Office (SFO) to the Ministry of Defence (MoD) that also highlighted an alleged major fraud operation in which officials helped themselves to some of the money.

The daily said BAE's chairman Sir Richard Evans may have been personally complicit in the operation of the 20 million-pound (32 million-dollar, 29-million euro) slush fund used to offer senior Saudis enticements, including prostitutes, sports cars and yachts.

The SFO's head sent a letter to the MoD's permanent secretary Sir Kevin Tebbit on March 8, 2001, in which she alleged BAE executives might have been helping themselves to some of the money.

Rosalind Wright, who was SFO head at the time, wrote: "According to (an ex-employee), the chairman of BAE, Sir Richard Evans, has been made aware of it, but either is prepared to tolerate it or, conceivably, is in some way complicit."

BAE is alleged to have paid more than 20 million pounds into its slush fund since the late 1980s, The Guardian said. Part of the money was subsequently used to "entertain" top Saudis.

"Ultimately, these services are paid for by the Ministry of Defence to whom BAE is a contractor for the supply of planes to the government of Saudi Arabia," the SFO's letter said.

Papers sent to Tebbit along with Wright's letter included alleged bogus invoices paid out for "visitor support" for Saudi officials monitoring the arms programmes.

Wright wrote: "There is evidence of excessive expenses, hospitality etc and some evidence of assets being used for private purposes..."

Wright told Tebbit she did not have enough evidence to justify an SFO inquiry but she said: "Concerns remain, and I thought it right to draw this to your attention since it is conceivable that government money has been misused.

"If evidence of financial misconduct is uncovered we would be pleased to look at it again with a view to criminal investigation."

Tebbit is said to have withheld the letter from Defence Secretary Geoff Hoon.

With acknowledgements to AFP and the Business Day.