Business spy war erupts between US and France: Paris forced to come clean on hi-tech dirty tricks, writes Leonard Doyle, West Europe Editor

THE FRENCH government has recalled two officials from the United States in the past nine weeks after they were apprehended trying to steal classified information on an experimental military aircraft, US intelligence sources said yesterday.

The incident could hardly come at a more embarrassing time for the French authorities, who were forced yesterday to acknowledge that its spies had instructions to conduct an ambitious economic espionage operation in the US in 1989 and 1990.

Claims by a French spokesperson yesterday that such operations were a thing of the past and that 'the facts . . . are out of date', have a hollow ring, in the light of the disclosures about spying activities against the manufacturers of a tilt-rotor aircraft, which is able to switch from being a helicopter to a conventional propeller-powered plane, once airborne.

The latest episode of commercial espionage comes when the US is on an offensive to protect its hi-tech, defence and trade secrets. Some 20 countries are believed to be active in economic espionage in the US, including Japan, Germany, Italy and Israel as well as France.

US intelligence agencies, with a budget said to exceed dollars 30bn ( pounds 19bn), have recently embarked on an aggressive counter-economic espionage strategy of which the French seem to be the first victims. The two French officials who were encouraged to leave the US after being caught red-handed by the FBI are believed to have been snooping on Textron, Bell and Boeing, the joint manufacturers of the experimental tilt-rotor V-22 Osprey, according to the intelligence sources.

The controversial aircraft takes off vertically like a helicopter, before tilting its twin rotors horizontally to fly at speeds of up to 350mph.

Though plagued with problems - four of the five prototypes have crashed - the aircraft could be useful for by-passing crowded European airports to bring business passengers direct to city centres. The disclosure follows a leak of a French intelligence document to both the Central Intelligence Agency and the Knight-Ridder news service which names 49 high- technology US companies, 24 financial services companies and US officials handling sensitive trade talks, such as Gatt, which are being targeted by spies for their negotiating strategies. The intelligence gathered by the French authorities is assumed to be fed directly to its many state-owned and subsidised hi-tech and defence firms.

The fall-out from the report helped to perusade the Hughes Aircraft Corporation not to participate in the Paris Air Show in June and has put the French authorities on the defensive. One item in the report - in French, on French bonded paper and stamped 'Defence Confidential' - expresses a high-priority interest in the company's HS601 satellite. Hughes was recently edged out by French competitors for a dollars 260m communications satellite system for the Arab world and its chairman, Michael Armstrong, said the CIA tip-off was 'the last straw' in persuading him to cancel the firm's attendance at the show.

The leaked document amounts to a masterplan for French spies operating under diplomatic or consular cover in the US, although the need for such cloak-and-dagger behaviour is questioned by Vincent Cannistraro, a retired top CIA official. 'The problem with the DGSE (the General Directorate for External Security) is that most of what it is doing here is mindless, since almost all the information is available in trade and industry publications. The two French intelligence operatives caught trying to steal information on the V-22 Osprey could have got the information legitimately,' he said, 'but the DGSE is a continual source of political embarrassment to the country. Even the DST (French internal security) holds them in contempt.'

The warnings to dozens of US companies about French activities was made via the State Department's Overseas Security Advisory Council, an organisation which brings corporations and several government agencies together and advises more than 1,000 companies about potential threats to their industrial secrets.

The issue of industrial spying has been the source of intense debate inside the Clinton administration and the intelligence community for several months, and it has been described by the Director of the CIA, James Woolsey, as the 'hottest topic' after fighting nuclear proliferation.