The German government has decided not to give Israel a massive subsidy for the purchase of German missile boats, due to the breakdown in Israeli-Palestinian peace talks, both Israeli and German officials said on Thursday.

For months now, Israel and Germany have been negotiating a deal under which Israel would purchase three or four German gunboats to protect its offshore gas fields in the Mediterranean Sea. The deal, first reported by Haaretz, was valued at about $1 billion before any discounts.

However, Israel had asked Germany for the same 30 percent discount it received on an earlier purchase of German submarines – a benefit that would be worth hundreds of millions of dollars. Berlin agreed to cover a third of the cost of the submarines as part of Chancellor Angela Merkel’s policy of bolstering Israel’s security.

The German decision not to subsidize the gunboats was first reported Thursday morning by the Israeli website Maariv Hashavua. According to that report, the Germans sent a “secret letter” announcing the decision to Prime Minister Benjamin Netanyahu’s office on Independence Day (May 6). But Haaretz has learned that the news came not in a letter, but in a phone call from Merkel’s national security advisor, Christoph Heusgen, to his Israeli counterpart, Joseph Cohen.

The conversation between Heusgen and Cohen was an extremely difficult one that quickly deteriorated into mutual recriminations. According to a senior Israeli official, Cohen accused the Germans of violating an explicit promise that Merkel made Netanyahu during a joint meeting of the German and Israeli cabinets in Jerusalem in February. Heusgen responded that Merkel never made any such promise.

The Germans said they would be happy to sell Israel the gunboats, but only at full price. Heusgen explained to Cohen that given the breakdown of Israeli-Palestinian peace talks, which has been blamed at least partly on Israeli settlement construction and that there is no chance the German parliament would approve subsidizing the gunboat deal.

Senior Israeli officials said they believe the seeds of this decision were sown during Merkel’s White House meeting with U.S. President Barack Obama two weeks ago when he voiced great frustration over Netanyahu’s conduct during the eight months of Israeli-Palestinian talks.

The gunboat issue also arose during U.S. National Security Advisor Susan Rice’s visit to Jerusalem last week. But Rice vehemently denied that Obama had asked Merkel to pressure Israel and said the two leaders never discussed the issue.

Senior German officials said Merkel had taken note of Obama’s statements, but that these did not exert a decisive influence on her decision.