The Pentagon has cleared Taiwan to take a two-stage approach to buying up to eight diesel submarines in a move that could revive the long-stalled potential multibillion-dollar deal.

In a letter to Taiwan's defense minister, obtained on Friday by Reuters, the Pentagon's point man for Asia, Richard Lawless, said separating the design and construction phases was legally permissible and administratively feasible.

Lawless, deputy undersecretary of defense for Asia and the Pacific, estimated the cost of the design phase at $360 million. He did not predict production costs.

Breaking the deal into two pieces could let it get under way without immediately committing billions of dollars to a project strongly opposed by China and controversial in Taiwan.

At a recent meeting with U.S. officials, potential prime contractors expressed continued interest in the Taiwan submarine program, and in competing under the two-phased acquisition approach, he told the minister, Lee Jye, in a letter dated June 27.

President Bush offered in April 2001 to help Taipei procure diesel-electric submarines despite strong opposition from China, which views Taiwan as a rogue province. Beijing has threatened to use force if necessary to bring the self-governing island of 23 million back to the fold.

Eight diesel-electric submarines have been estimated to cost as much $8 billion to $12 billion, depending on how they are equipped. Such estimates are vague because the United States has built nuclear submarines - not diesel ones - for 50 years. Submarine suppliers in Europe and elsewhere have balked at selling their designs for fear of angering Beijing.

The deal has been mired in Taiwan's domestic political wrangling with other big-ticket weapons Bush offered in 2001, including 12 P-3C Orion submarine-hunting aircraft.

The Nationalist Party and their partners in opposition have kept the issue from getting on the legislative agenda, arguing Taiwan cannot afford the arms, nor to provoke China.

The delay has fueled worries in Washington that Taipei is not doing enough for its own defense in the belief that the United States would come to its rescue in a crunch.

The two-stage approach was the brain child of Rep. Rob Simmons, a Republican whose Connecticut district includes General Dynamics Corp.'s Electric Boat shipyard, which builds submarines for the U.S. Navy but has been laying off hundreds of designers for lack of work.

The question was about price and what are you getting for the price, Simmons said in a telephone interview, welcoming the Pentagon's stance. Taiwan very reasonably said 'We don't know what we're getting for $8, 9, 10 billion'.

Another potential prime contractor is Los Angeles-based Northrop Grumman Corp. Two other big U.S. contractors, Raytheon Co. and Lockheed Martin Corp., have experience in undersea combat system integration and maintenance, but do not build ships.

This is very positive news, said Kendell Pease, a spokesman for General Dynamics. But we must remember it's still early in the process.

Shirley Kan, an expert on Taiwan's military at the Congressional Research Service, said Taipei had been waiting since April for the Bush administration to spell out whether it would break out the design phase.

Now the ball is back in Taiwan's court, she said. It remains to be seen whether Taipei can build a consensus to commit to at least the design stage as a possible prelude to acquiring the subs.

In his letter, Lawless said the two-stage program likely would boost costs and the risk of delays as potential foreign design agents and their governments may be less likely to participate.

China