Barack Obama and Israeli Prime Minister Benjamin Netanyahu AP WASHINGTON (Reuters) - The United States and Israel have reached final agreement on a record $38 billion package of U.S. military aid and the new 10-year pact is expected to be signed as early as Wednesday, sources close to the matter told Reuters.

The deal will represent the biggest pledge of U.S. military assistance made to any country but also involves major concessions granted by Israeli Prime Minister Benjamin Netanyahu, according to officials on both sides and U.S. congressional aides.

Those include Israel’s agreement not to seek additional funds from Congress beyond what will be guaranteed annually in the new package, and to phase out a special arrangement that has allowed Israel to spend part of its U.S. aid on its own defense industry instead of on American-made weapons, the officials said.

Israel’s chief negotiator, Jacob Nagel, acting head of Netanyahu’s national security council, arrived in Washington in preparation for a signing ceremony, according to one source familiar with the matter. The White House also began briefing members of Congress on the deal.

Nearly 10 months of drawn-out aid negotiations have underscored continuing friction between President Barack Obama and Netanyahu over last year's U.S.-led nuclear deal with Israel's arch-foe Iran, an accord the Israeli leader opposed. The United States and Israel have also been at odds over the Palestinians.

But the right-wing Israeli premier decided it would be best to forge a new arrangement with Obama, who leaves office in January, rather than hoping for better terms from the next U.S. administration, according to officials on both sides.

A deal now allows him to avoid uncertainties surrounding the next president, whether Democrat Hillary Clinton or Republican Donald Trump, and to give Israel’s defense establishment the ability to plan ahead.

Obama's aides want a new deal before his presidency ends, seeing it as an important part of his legacy. Republican critics accuse him of not being attentive enough to Israel's security, which the White House strongly denies, and of taking too hard of a line with the Israeli leader.

U.S. President Barack Obama meets with Israeli Prime Minister Benjamin Netanyahu in the Oval office of the White House in Washington Thomson Reuters

Israel has long been a major recipient of U.S. aid, mostly in the form of military assistance against a backdrop of an ebbing and flowing conflict with the Palestinians and Israel's neighbors, as well as threats from Iran.

The 10-year aid packages underpin Washington’s congressionally mandated requirement to help maintain Israel’s “qualitative military edge” in the region.

MISSILE DEFENCE

The deal, known as a memorandum of understanding, or MOU, calls for $3.8 billion a year in aid, up from $3.1 billion annually under the current pact, which expires in 2018, officials say. Netanyahu had originally sought upwards of $4.5 billion a year.

The new package for the first time will incorporate money for Israeli missile defense – setting the amount at $500 million a year - which until now has been funded ad hoc by Congress. U.S. lawmakers have in recent years given Israel up to $600 million in annual discretionary funds for this purpose.

Officials say Israel has agreed not to lobby Congress for additional missile defense funds during the life of the new MOU, a pledge expected to be made in a side letter or annex to the agreement. But the wording is likely to be flexible enough to allow exceptions in case of a war or other major crisis.

The new agreement is expected to be officially rolled out as early as Wednesday, according to congressional aides and a source close to the matter.

It will not be signed by Obama and Netanyahu, who have had a fraught relationship, but instead by two of their senior aides, in keeping with the way the two governments have formally sealed previous deals of this type.

Israel's Prime Minister Netanyahu attends cabinet meeting in Jerusalem Thomson Reuters

Netanyahu gave ground on several major points. He conceded to a U.S. demand for a gradual phasing-out, starting in 2020, of the 26.3 percent share of the aid money that Israel can spend on its own military industries rather than on American products. The provision originated in the 1980s to help Israel build up its defense industry, which is now a major global player.

Netanyahu also agreed to end Israel’s use of 13 percent of the U.S. money on military fuel purchases, officials said.

Obama and Netanyahu will both be in New York next week for the opening of the U.N. General Assembly, and officials have not ruled out the possibility of a meeting on the sidelines.

Negotiators working behind closed doors had all but completed the new package several weeks ago. But an announcement was quietly put on hold as objections were raised by a key pro-Israel lawmaker, Republican U.S. Senator Lindsey Graham, who had called for a more generous and less restrictive aid package, sources familiar with the matter said.

It was unclear, however, whether the administration’s differences with Graham had been resolved or it had decided to go ahead with the announcement anyway.

U.S. congressional approval is needed each year for disbursement of the aid to Israel as part of the annual budget process. But little opposition is expected in Congress, where support for Israel’s security is strong.

(Additional reporting by Luke Baker in Jerusalem; Editing by Alison Williams and James Dalgleish)