Cape Town - Cabinet has decided to terminate the multi-billion rand Airbus A400M military aircraft contract, government spokesperson Themba Maseko said on Thursday.

Briefing the media following Wednesday's regular Cabinet meeting, he said this was because of extensive cost escalation and delays in the contractual delivery time.

The original cost of acquiring the eight military airlift planes was R17bn, but going ahead with the deal would now mean paying in the region of R40bn due to the cost escalations, he said.

The R2.9bn already paid would be refunded.

There would be no penalties for cancelling the contract, because of the delays in the delivery deadlines stipulated in the contract.

"The cost escalation would have placed an unaffordable burden on the taxpayer at a time when the national fiscus is under pressure due to the economic down turn," read the statement from cabinet.

Maseko said cabinet had already taken the decision two weeks earlier, but had wanted to wait until all parties involved had been officially informed.

He did, however, concede that the cancellation may cause some diplomatic tensions, especially as the invitation to participate in the Airbus programme came from Nato.

The SA Air Force would now have to go back to the drawing board to re-assess its current airlift capacity and needs.

The cancellation might impact on South Africa's peacekeeping missions in Africa, Maseko said.

- Sapa