The increasingly fragile relationship between Israel and Turkey showed no sign of improvement this week after the Israeli government cancelled a military contract worth more than £90 million.

The government had been due to supply Turkey with an aerial intelligence system in a deal agreed two years ago. But, according to an official speaking anonymously, concerns about Turkey's shifting allegiances in the Middle East prompted Israel to pull out.

The Ministry of Defence said that all decisions about contracts were taken "in accordance with the specific diplomatic and security considerations".

However, the ministry stressed that the decision was taken with regard to the specific technology and was nothing to do with the overall relationship between the two countries.

Concern over the deterioration of the once-strong relationship, severely damaged by the fall-out from the deaths of Turkish activists on a flotilla to Gaza last year, was said to be the reason Prime Minister Benjamin Netanyahu tried to block a Knesset debate on official recognition of the Armenian genocide.

Turkey has long refused to recognise the Armenians' claim that some 1.5 million people were massacred in 1915 and 1916, saying instead that 500,000 people died fighting against the Ottoman Empire during the First World War.

Earlier this month, France angered Turkey by passing a law making it illegal to deny that what happened in 1915 was genocide.

Turkey has already downgraded diplomatic relations to the lowest level and expelled the Israeli ambassador; if Israel was to follow France's example, this would further strain ties.