(Reuters) - Britain will order the first reactor for a new generation of nuclear-armed submarines next week as part of a 1 billion pound ($1.6 billion) contract with Rolls-Royce, a defence ministry source said on Sunday, in a move that could strain the coalition government.
The deal will include an 11-year refit of Britain's sole submarine propulsion reactor factory at Derby in central England, said Defence Secretary Philip Hammond, who will formally announce the plans to parliament on Monday.
"This is sustaining a sovereign capability in the UK and some very high end technical skills in the UK for the next 40 or 50 years," he told BBC television, without giving further details of the contract.
The investment will protect 300 jobs at the Rolls-Royce factory and many others at suppliers elsewhere, the source said.
The 1 billion pound value of the deal will be shared between Rolls-Royce and its other industrial partners, a source close to the company said.
The two-party coalition government is split over plans to replace Britain's four Vanguard submarines at an estimated cost of 25 billion pounds when they retire from service in the 2020s.
Prime Minister David Cameron's Conservative Party - to which Hammond belongs - wants a new fleet of submarines that will continue to carry the Vanguard's Trident missiles, maintaining Britain's independent nuclear capability.
Their smaller Liberal Democrat partners are pushing for cheaper and less potent alternatives, arguing that the current capability - the ability to obliterate Moscow - is an outdated hangover from the Cold War.
The two parties have postponed a final decision till 2016, after the next parliamentary election, while agreeing in the meantime to fund the advance work needed to allow the submarines to be built on schedule should they be commissioned.
The Liberal Democrats insist that the advance contracts do not represent a commitment to a like-for-like renewal, but some analysts say it is unlikely that cash-strapped Britain would lay out huge sums on design and equipment that it would later ditch.
Hammond insisted the government had not yet made up its mind about Britain's future nuclear deterrent.
"The government's policy is very clear. We are committed to maintaining a credible nuclear deterrent and we are placing orders now for the long-lead items that will be necessary to deliver a successor to the Vanguard class submarines in the late 2020s," Hammond said.
"But the actual decision to go ahead and build them won't have to be taken until 2016 and what we are doing at the moment is ordering the things that have to be ordered now to give us that option."
The government said last year it expected to spend 3 billion pounds by 2015 on preparatory work for the new submarine fleet.
The Rolls-Royce deal also includes a contract to build the reactor for the last of seven Astute class nuclear-powered attack submarines that Britain already has on order.
The nuclear propulsion plant for the Vanguard's successor will be the more advanced Pressurised Water Reactor 3 (PWR3) system, the government said last year.
Last month Hammond announced 350 million pounds of contracts, mainly with defence contractor BAE Systems, to design the Vanguard's successor submarines.