The British newspaper The Sunday Times reported Sunday that Saudi Arabia is threatening to suspend diplomatic ties with Britain, unless the investigation into a 60 million pound "slush fund" set up for the personal use of some members of the Saudi royal family is halted.

A senior Saudi diplomat in London, The Sunday Times reported, delivered an ultimatum to British Prime Minister Tony Blair, saying unless the investigation into an allegedly corrupt defense deal is dropped, the Saudis will sever all diplomatic ties with Britain.

The Saudis object to the criminal investigation being conducted by Britain's Serious Fraud Office (SFO) into the allegations that BAE systems, Britain's biggest defense company, set up a fund for the personal use of certain members of the Saudi royal family.

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According to the report, the fund was allegedly set up in order to ensure that Saudi Arabia would continue to renew its contract with BAE systems. The partnership between the two, the biggest defense contract in British history, has kept BAE in business for 20 years.

At least five people suspected of involvement in the affair have already been arrested. Two of the suspects are Peter Wilson, BAE's managing director of international programs, and Tony Winship, a former company official who allegedly provided the Saudis with travel services while overseeing two travel firms. Both deny the allegations.

The Saudi threat came immediately following the royal family's discovery that confidential financial documents relating to Swiss bank accounts had been disclosed to the SFO, the paper reported.

The Saudi royal family instructed a senior Saudi diplomat to hold a meeting with Jonathan Powell, Blair's chief of staff, The Sunday Times reported.

The diplomat is said to have delivered a 12-page letter drawn up by a Saudi law firm demanding a detailed explanation of why the investigation was still going on.

Sources say, according the Sunday Times, that the Saudis had received a promise from Blair in July of last year that the investigation would stop.

"The Saudis are claiming in this letter that the British government has broken its undertaking to keep details of the (defense) deal confidential," the paper quoted a source who has read the document as saying.

"It regards the disclosure of these documents to the SFO from Switzerland, and from the Ministry of Defense, as a totally unacceptable breach of that undertaking," said the source. "They are claiming the deal is protected by sovereign national immunity and that the British have no right to poke around in their private financial affairs."