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A high-stakes court battle between BAE Systems and the Serious Fraud Office loomed late on Thursday

after corruption investigators decided to press for criminal charges against the arms manufacturer over its dealings in eastern Europe, South Africa and Tanzania.

Thursday’s announcement by the SFO that it had decided to seek the consent of Baroness Scotland, the attorney-general, to prosecute the company over alleged backhand payments to middlemen sent shares in BAE lower. They closed down more than 4 per cent.

There were fears that a successful prosecution – or a US-style plea deal involving a fine running to

hundreds of millions of pounds – could have severe consequences for the company, including the possibility of its exclusion from contracts in the US, Europe and elsewhere.

"I’m afraid it did cross my mind … the British government acts as a cheerleader for arms sales."

An 11th-hour deal between the SFO and BAE should not be ruled out, said people familiar with the situation. But sources close to the company, which has repeatedly denied wrongdoing, made clear it was not prepared to settle at any price.

The SFO’s referral to the attorney-general will throw a hugely controversial case of alleged bribery back into the public spotlight after Tony Blair, former prime minister, intervened in 2006 following Saudi Arabian pressure to stop a probe into the £43bn Al-Yamamah deal under which Riyadh bought UK aircraft and other defence equipment.

The decision to drop that inquiry, which the SFO said it had made on public interest grounds, caused a furore. Critics accused Downing Street of caving in to Saudi threats to cancel a jet-fighter contract and withdraw intelligence co-operation.

Ministers on Thursday did not explicitly rule out blocking a prosecution again on public interest grounds. However, senior government insiders suggested that the economic interests and jobs at stake in relation to the countries involved were not on the same scale as the case involving Saudi Arabia.

Clare Short, who as international development secretary in 2001 opposed the sale of a £28m radar system to Tanzania, told the Financial Times on Thursday that she was confident Number 10 would not interfere again.

“I’m afraid it did cross my mind … the British government acts as a cheerleader for arms sales,” she said. “But after the fuss about the Saudi case, I don’t think they’d dare.”

The attorney-general’s office said Baroness Scotland had been kept “aware” of the case by the SFO. BAE said that, should the attorney-general proceed with a case, it would “deal with any issues raised in those proceedings at the appropriate time and, if necessary, in court”.