Ministry officials remain committed to concluding a contract with MBDA for the Medium Extended Air Defense System (MEADS) to replace the Patriot air and missile defence system but said there was still work to do on the MBDA proposal, as well as on how the overall project would be managed, the sources said.
Regardless of the MEADS outcome, the ministry plans to spend several hundred million euros to modernise the software and hardware of the German military's existing Patriot system, which was built by Raytheon Co, the sources said.
Coming at a time when NATO is beefing up its presence in eastern Europe due to fears of about a greater military threat from Russia, MEADS extends the coverage of protection and offers enhanced air and missile defence from a range of threats.
The delay in the MEADS project marks another setback for Defence Minister Ursula von der Leyen, who has sought to reform Germany's troubled weapons procurement process since taking office in late 2013. A second multi-billion euro programme to build a new multi-role ship has also been delayed.
Germany selected MEADS in 2015 to replace its Patriot system but it has taken far longer than expected to move forward.
Von der Leyen told Reuters in September she hoped to submit a MEADS contract to parliament for approval in the spring, which already marked a delay from the previous expectation for a contract by the end of 2016.
Then in October, sources said the proposal had come in billions of euros higher than the previous estimate of 4 billion euros ($4.2 billion) and lacked some critical details.
Ministry sources said, however, that they still expected the MEADS system to be ready for use by 2025, as planned.
"We don't want to buy a pig in a poke," one of the sources said. "We want to be sure that we have a strong general contractor on the other side that can manage the projects in the long run and achieve the goal."
MEADS was developed by MBDA, which is owned by Airbus Group, Britain's BAE Systems Plc and Italy's Leonardo Finmeccanica Spa, in a joint venture with U.S. arms maker Lockheed Martin Corp..
Work on the missile defence programme was initially funded by Germany, Italy and the United States but Washington dropped out of the programme several years ago.
The sources said working with MBDA had been disappointing so far, raising questions about the missile maker's ability to manage such a large project on its own and suggesting that it would be asked to give Lockheed a larger role - and more responsibility - to lower the project's risk.
Experts say the project could slip into spring 2018 given it is unlikely a contract will be approved before parliament's summer recess and it will then probably take months before a new government is constituted after federal elections on Sept. 24.
The delay also means the ministry must reprogramme 100 million euros in funding already in the 2017 budget.
Writing by Andrea Shalal; editing by Madeline Chambers and David Clarke
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)