France suspended Wednesday the delivery of the first of two Mistral-class warships to Russia "until November" after fierce criticism from its allies given the crisis in Ukraine.
Paris agreed in 2011 to build and sell the two advanced helicopter assault ships to Russia for a total of €1.2 billion ($1.6 billion), with the first scheduled for delivery in October or November and the second in 2015.
French leaders had refused to back down on a sale seen as crucial to a country suffering from stagnant growth and record unemployment, despite widespread condemnation due to Russia's involvement in the Ukraine crisis.
"The President of the Republic declared that, despite the prospect of a ceasefire, the conditions for France to deliver the first warship are not to date in place," Francois Hollande's office announced Wednesday, on the eve of a major NATO summit in Wales.
The statement came just hours after Russian President Vladimir Putin raised hope of an end to the four-month war in the former Soviet republic, calling on pro-Kremlin rebels and government forces to cease fire and agree to the broad terms of a truce.
The situation in Ukraine is "serious... the actions taken recently by Russia in eastern Ukraine go against the foundations of Europe's security," said the French statement, issued after a meeting of the country's defence council.
However, a French diplomatic source told AFP that the contract is only suspended until November - when the delivery was due.
"At that date we will see what the financial consequences are," the source said, adding that the suspension of the deal "could cost us one billion euros".
However expert Philippe Migault, from the French think tank IRIS (Institute de Relations internaionales et strategique) told The Local he was not convinced the deal will be pulled.
"It's like any diplomatic statement, in that its almost certainly been given just to send a message to the French public and to France's allies to show that this deal is not done and all options are still possible," he said.
"However I expect it will eventually go ahead as planned. It would be disastrous for France's arms industry if the government suggested that it will cancel the deal.
"France is one the biggest exporter of arms around the world and it would greatly harm its reputation. As well as the fact France would have to pay back around one billion euros to Russia as well as fines for cancelling the deal," Migault said.
'Hit the pause button'
The planned delivery of the warships had created outrage, with President Barack Obama expressing "concerns" about the proposed sales. a
Washington raised fresh concerns on Wednesday, before State Department spokeswoman Jennifer Psaki greeted the suspension of the delivery as "a wise decision".
A spokeswoman for NATO chief Anders Fogh Rasmussen said he "has always said this is a national decision and he was confident that France would take into account the security situation".
Moscow, on the other hand, played down the importance of the blow. Russian Deputy Defence Minister Yuriy Borisov said it was "not a tragedy for us in terms of rearmament".
Since the beginning of the summer, some 400 Russian sailors have been training in western France on the operation of the first warship, named "Vladivostok".
The Baltic states, worried that Russia might set its sights further, hailed France's announcement.
"We welcome France's decision. It is in line with Lithuanian interests," Lithuania's defence minister Juozas Olekas told AFP.
His comments were echoed by Latvia's foreign minister Edgars Rinkevics said on Twitter that the move by Paris was the "right decision and right time".
The suspension could have a major impact on jobs at the STX dockyards in Saint-Nazaire, where the ships are being built. Union leaders at the yard said they were "stupefied" by the decision, particularly since the first ship was almost finished.