Germany is reported to have agreed to provide Israel with a sixth Dolphin class submarine, supposedly capable of firing nuclear-tipped missiles at Iran, and pay one-third of the cost after it looked like Berlin was prepared to scrap the deal.

The German newsmagazine Der Spiegel reported Oct. 30 that German Chancellor Angela Merkel's coalition government was angry at Israeli Prime Minister Binyamin Netanyahu for approving construction of a Jewish settlement in Arab East Jerusalem and failing to make concessions to achieve a peace deal with the Palestinians.

A German official in Berlin disclosed Wednesday that the Dolphin deal will go ahead, with the government setting aside $180 million in the 2012 budget to cover part of the cost.

There was no explanation about why Merkel's coalition, led by her Christian Democratic Union Party, had decided to go ahead with the subsidized sale.

Merkel's government and Israel's Defense Ministry have been tight-lipped about the report. But talks on the deal stalled in 2010 after the Germans declined to underwrite the sixth Dolphin.

Under Germany's long-running policy of providing Israel with heavily subsidized weapons systems as part of a 1953 reparations agreement linked to the Holocaust of the Nazi era, Berlin donated the first two Dolphins to the Israeli navy in the late 1990s.

It paid half the $700 million cost of the third of the diesel-electric boats, heavily modified versions of the Type-209 submarines developed by the Howaldtswerke-Deutsche Werft AG shipyard in Kiel.

In 2006, Israel ordered two more boats during the administration of Chancellor Gerhard Schroeder. Berlin agreed to pick up one-third of the total cost of $1.27 billion of the more advanced subs. These are scheduled for delivery in 2012-13.

The Dolphins are Israel's most expensive and advanced weapons platforms and its most strategic because of their reported nuclear capability.

This gives the Jewish state, militarily the most powerful in the Middle East, the option of a pre-emptive first-strike attack by land, sea or air -- or all three together.

However, it's considered that the 1,925-ton submarines bolster Israel's deterrent capabilities and would more likely be used for a second retaliatory nuclear strike against Iran.

At least one of the three Dolphins in service with the Israelis is believed to be deployed in the Arabian Sea or the Red Sea at all times to cover Iran.

The new boats are more advanced variants of those the Israelis have and will incorporate modifications specified by the Israeli navy, although these haven't been disclosed.

These boats have a reported range of 2,800 miles, which greatly enhances Israel's strategic reach.

They will also incorporate an Air Independent Propulsion, similar to the system used on German Type-212 submarines, that allows them to spend much more time submerged and thus are less likely to be detected.

The existing Dolphin force is stationed at the naval base at Haifa on Israel's Mediterranean coast.

Once the flotilla is expanded, some boats may be based at Eilat, Israel's only port on the Gulf of Aqaba that runs into the Red Sea. Military spokesman have denied that's on the cards.

In 2010, Israel deployed Dolphins through the Suez Canal from the Mediterranean and into the Red Sea in what was seen as a clear warning to Iran.

But these days there are concerns that Egypt's post-Mubarak regime, which may become less inclined to observe Cairo's landmark 1979 peace treaty with Israel, could close the canal to Israeli shipping.

That would make a Red Sea base for some of the Dolphins a strategic objective.

The acquisition of a sixth Dolphin underlines the growing importance of the Israel navy, which since the foundation of the state in 1948 has had the lowest priority among the country's armed services.

Israel has been seeking to build up its naval forces, partly to counter the Iranian ballistic missile threat, with modern surface vessels as well.

Military planners say two new $300 million corvettes that could be armed with a naval version of the Arrow-2 high-altitude anti-missile system may be built at Israel Shipyards in Haifa.