Israel was embroiled in fresh controversy on Sunday over its purchase of submarines from German company ThyssenKrupp after reports that the country's arch-enemy Iran holds a stake in the firm.

The attorney general had already ordered police to look into allegations of improper conduct in the planned purchase of the submarines, and reports of Iran's link to the company have fuelled more criticism.

Israel sees Iran as its main enemy in the region, and suggestions that the Islamic republic would benefit from the Jewish state's defence purchases have made headlines.

Media reported that Iranian holding company IFIC continues to own a 4.5 percent stake in the German firm.

"Israeli money, Iranian profits," a headline in the newspaper Yedioth Ahronoth said Sunday.

ThyssenKrupp told AFP that IFIC owned around seven percent of the company until May 2003, when it fell below five percent, without providing details on the size of its current stake, if any.

Reports at the time said the United States had pressured ThyssenKrupp to reduce Iran's stake to below five percent.

The Iranian state's representative on the company's supervisory board was also removed.

Israel is reportedly negotiating to buy the three submarines at a combined price of 1.2 billion euros ($1.3 billion), to replace the oldest vessels in its existing Dolphin fleet, which began entering service in 1999.

It already has five of the state-of-the-art German submarines, with a sixth due for delivery in 2017, Maariv newspaper reported.

Last month, Israeli Attorney General Avichai Mandelblit ordered police to probe allegations of improper conduct by a confidant of Prime Minister Benjamin Netanyahu in the planned purchase of the vessels.

Media reports have alleged a conflict of interest over the role played by the Netanyahu family lawyer, David Shimron, who also reportedly represents the Israeli agent of ThyssenKrupp.

The German firm told AFP they require their partners to get approval when they hire subcontractors and that there has not been a request for such an approval from their Israeli representative Miki Ganor. They are conducting an internal investigation.

Foreign military sources say the Dolphins can be equipped with missiles armed with nuclear warheads.

Israel is believed to be the Middle East's sole if undeclared nuclear power, but refuses to confirm or deny that it has such weapons.

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THYSSENKRUPP