Argentine Defense Ministry officials said the KC-390 would be jointly developed under the aegis of Brazilian aircraft manufacturer Embraer, which already controls a niche market in regional transport and business jets.

The entry of KC-390, however, will put Embraer in direct rivalry to Lockheed Martin Corp.'s Hercules C-130 transport aircraft, Russian and Chinese military transport planes.

Brazil began a multibillion-dollar regeneration program for its defense industry as part of a strategy to recapture a global market share the country lost with the switch from the military to democratic rule in the 1980s.

Brazil's defense industry nearly collapsed when the Iran-Iraq war ended in 1988, because of the exporters' heavy dependence on arms buying by former Iraqi leader Saddam Hussein and the decline in Brazilian government support for the industry.

By 1990, two major manufacturers, Engesa and Avibras, filed for bankruptcy and manufacturing and exports languished for the next decade.

Brazil's economic rebound and increased spending power has seen the country shopping for defense equipment and military technology transfers in Europe. Billions more are earmarked for fighter jets, tanks and submarines yet to be chosen.

Decision on further military purchases was deferred as Brazil went to the polls to elect a new president and successor to Luiz Inacio Lula de Silva, prime mover behind the regeneration program. President-elect Dilma Rousseff hasn't revealed her intentions regarding future arms purchases.

The KC-390 cargo plane is likely to be built largely in Brazil with Argentina setting up capacity to manufacture some of the components. Details of the division of manufacturing lines between the two countries will be worked out in a follow-up to the recently signed letter of intent.

Embraer says it is designing the aircraft from scratch, fueling speculation the company is looking to incorporate as much new technology as possible without attracting the ire of U.S. manufacturers and aircraft makers elsewhere.

Embraer recently signed partnership deals with Chile, Colombia, Czech Republic and Portugal that could also affect the way the KC-390 will be built and marketed.

Although Embraer has tentative orders for the jet transport from Brazil's own air force and interest from Argentine air force the expansion of the project means Embrace will be looking to markets further beyond for enhanced revenue.

Aircraft manufacturers are feeling the heat from Embraer's entry into the military transport market but their stance is complicated by the emergence of Brazil as a major customer for other countries' aircraft manufacturing as well.

A $5 billion fighter-jet contract is soon to be considered by Rousseff's administration. Its outcome, already politically charged, is likely to affect the market potential for KC-390 as well.

The final outcome is far from certain, not only because of each of the individual aircraft's sellable features, but also because of politics. France's Dassault, manufacturer of the Rafale jet, is competing against Sweden's Saab AB and the Boeing Co., which is pushing F-18 Super Hornet for the large contract.

French President Nicolas Sarkozy is backing Rafale -- and openly supporting Brazil's membership of the U.N. Security Council, a long-cherished goal for successive Brazilian governments.

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