Germany agreed to sell Israel a new submarine only after the Jewish state released millions of dollars in customs duties to the Palestinian Authority, Israeli army radio reported Wednesday.

Quoting an unnamed senior Israeli official, the radio said the sale of the Dolphin-class submarine, the sixth to be supplied by Germany, was the "cherry on the cake Israel received after acquiescing to the European demand."

On Sunday, German newspaper Welt am Sonntag said that Berlin's approval of the sale last week came after "Israeli concessions."

The same day the German decision was made public, Israel said it would release tens of millions of dollars it had withheld from the PA for a month, following the Palestinians' admission to UNESCO on October 30.

International pressure was put on Israeli Prime Minister Benjamin Netanyahu to release the funds.

The money is from customs duties levied on goods destined for Palestinian markets that transit through Israeli ports, and constitute a large percentage of the Palestinian budget.

A statement from Netanyahu's office said the decision to unfreeze the funds had followed "the cessation of unilateral steps by the Palestinian Authority."

The Israeli navy currently has three German-made Dolphin-class submarines, two of which were bought after the 1991 Gulf War. Two others are under construction at Kiel shipyard and are due for delivery in 2012.

Media reports have said the submarines can carry nuclear warheads and have an operating range of 4,500 kilometres (2,800 miles).

A spokesman for Netanyahu's office refused to comment on the army radio report.