Shares in British arms manufacturer BAE Systems plunged 8 per cent yesterday after the US department of justice launched an official investigation into Saudi arms deals.

The US securities and exchange commission (SEC) is also investigating BAE for possible violations of the books and records provisions of the US anti-bribery law known as the foreign corrupt practices act, two people familiar with the matter said yesterday.

The news is highly embarrassing for the British government, which intervened to halt a similar inquiry by the British serious fraud office.

The SEC can only seek civil penalties, but its accounting experts routinely work with prosecutors on complex financial cases. BAE said it had not been notified of an SEC investigation.

The company is planning to offer full assistance to department of justice investigators, including offering personal testimony if needed from directors such as Mike Turner, chief executive.

However, the scope of the department's inquiry could depend on the level of access granted to confidential documents by the British ministry of defence, the main signatory on the 20-year-old Al-Yamamah case at the centre of the probe.

The MoD is understood to be seeking legal advice before it comments on whether it will provide unfettered help. One ministry official said the MoD would need to "advise and consult" on what would be released to the US.

Britain and Saudi Arabia are in the final stage of talks on a new £10 billion deal to supply 72 Eurofighter Typhoons to the kingdom, though BAE executives believe this will go ahead in spite of the new US investigation.

BAE is also confident that a $4.1 billion deal to buy Armor Holdings of the US, which makes armour for Humvee vehicles, will be approved by US authorities.

The department of justice could, if it finds evidence, prosecute BAE and force it to pay fines, accept an independent monitor or bar it from winning US government contracts, although this is extremely rare.