Taiwanese military authorities have rejected the demand, which they termed "unreasonable," the United Daily News quoted a defense ministry source as saying.

Taiwan was willing to pay 28.5 million dollars in fees, the source said.

The cost of the deal is estimated at three to four billion US dollars. The fees demanded by the United States are for the drafting of the detailed purchase plan and evaluating the deal, the paper reported.

"Since the gap was so wide... no agreement was reached between the two sides over the past few months," the paper said, adding that the arms deal was virtually grounded.

Taiwan's defense ministry declined to comment.

US President George W. Bush in April 2001 approved the sale of eight diesel-electric submarines to Taiwan as part of Washington's most comprehensive arms package to the island since 1992.

A group set up by the United States to facilitate the deal called off a Taiwan visit some time between late March and early April due to the difference on the fees, the United Daily News said.

Washington had planned to open the bid for the arms deal this month, with the winner announced early next year, it said.

The first submarines could join the Taiwanese navy in 2010 at the earliest.

The Pentagon had in the past rejected Taiwan requests for submarines because they were considered offensive weapons.

It now argues that submarines are the best defense against a growing Chinese submarine threat to Taiwan's harbors and fleet.

China and Taiwan split in 1949 at the end of a civil war, but Beijing has repeatedly threatened to invade Taiwan if it declares independence.

SPACE.WIRE