Germany is reconsidering its decision to sell a sixth advanced Dolphin Class nuclear submarine to Israel.
According to Spiegel Online, the decision was prompted by tensions between the two nations over the approval of new housing plans in east Jerusalem.
The new submarine was expected to join the Israeli Navy's submarine fleet to replace the ageing Gal class submarines.
Germany had agreed to grant Israel €135m for the construction of a sixth submarine earlier in 2011.
The Israeli Navy currently has three Dolphin Class submarines, and is expected to receive two more in 2012, which are currently under construction in Germany.
The vessels can carry nuclear warheads and are capable of conducting long-range security missions along the borders.