U.S. Defense contractors are looking at a potentially sharp downturn in arms sales to key Arab states like Saudi Arabia and Egypt, for decades their best foreign customers, because of the Obama administration's effort to forge a new relationship with Iran and to punish the Egyptian military for usurping their country's first Islamist president.

The Saudis are reported to be seeking to buy five German Type-209 submarines, similar to those acquired by Israel and capable of launching nuclear-tipped cruise missiles, for $3.4 billion, with a long-term program of up to 25 boats in a $16.03 billion deal.

Germany's Bild newspaper, citing Berlin government sources, reported Sunday that Chancellor Angela Merkel's new coalition had indicated to Riyadh that its request would be given a sympathetic review once the new government was firmly established.

The German government declined comment and the defense giant Thyssenkrupp which builds the Type-209 submarines at the Howaldtswerke-Deustche Werft AG shipyard in Kiel, said there is "no project on submarines for Saudi Arabia."

Riyadh, despite its anger at Washington for seeking a rapprochement with Iran, the kingdom's principal rival and religious adversary in the region, said nothing.

But it's been showing a lot of interest in German weapons systems of late, even before the rift with the administration of U.S. President Barack Obama.

The Saudis have been negotiating with the Germans for a couple of years to purchase at least 270 Leopard 2A7+ main battle tanks, Germany's most advanced, built by Krauss-Maffei Wegman and Rheinmetall, both of Munich, for $2.85 billion.

The Saudis have hinted they may go as high as 600-800 Leopards, a deal potentially worth around $13.5 billion, with long-term and lucrative support programs.

It depends on what tanks the Saudis want to replace in their inventory, which includes 150 French AMX-30s, or their 450 U.S.-built M60A3s. The Saudis' frontline tank force consists of 300-plus M1A2 Abrams built by General Dynamics Land Systems.

Over the last two or three years, Merkel's relaxation of Germany's once-ironclad restrictions on military exports to countries in war zones or facing internal unrest has run into considerable opposition in Germany.

But the prospect of megadeals like these, amid sweeping European defense cuts, have won over many critics, including the Finance Ministry in Berlin.

The Germans are also reported to be negotiating with Egypt for two Type-209 submarines, the design model for the six Dolphin-class boats that Israel has acquired in recent years or has on order.

When the Egyptian deal was first reported in mid-2012, Israel was peeved, not just that Egypt was seeking such advanced naval platforms that could challenge the Jewish state's naval supremacy in the region, but that Germany, which had pledged to protect Israel's security, a cornerstone of post-war German policy because of the Holocaust, was thinking of selling the subs to an Arab state.

Given Israel's reliance on the Egyptian military to crush Islamist forces, including jihadists now operating in the Sinai Peninsula that abuts the Jewish state, Israeli leaders may be willing to let that one slide.

But they're not happy the Obama administration has suspended a hefty chunk of the $1.3 billion a year it gives to Egypt in military aid -- a program that began in 1979 when Egypt signed a peace testy with Israel -- as a result of the July 3 ouster of President Mohamed Morsi of the Muslim Brotherhood.

Egypt's now openly looking to Moscow for arms, as it did during the 1960s and 70s until it took up with the United States and signed the 1979 treaty. This has caused unease in Washington and in Israel.

That could be a bluff, but there are reports Cairo's mulling a $4 billion arms package with Russia, although given the parlous state of Egypt's economy, that would entail generous Russian loans.

Still, winning back Egypt would be feather in the cap of Russian President Vladimir Putin, who sees Russian arms sales to Arab states as a means to restore Moscow's former influence in the region as U.S. power ebbs.

Wasting no time, Putin's sending Defense Minister Sergei Shoigu and his veteran foreign minister, Sergei Lavrov, to Cairo for talks on "military and technical cooperation" -- read, arms sales -- Wednesday and Thursday.