Feb. 19 (Bloomberg) -- Raytheon Co., BAE Systems Plc and rivals said they expect six Persian Gulf Arab states, including Saudi Arabia, to buy more military equipment such as missiles and drones in 2007 amid local leaders' rising concern over Iran.

Lockheed Martin Corp. and Boeing Co., the two biggest U.S. defense contractors, as well as BAE, Europe's biggest, and Raytheon, the world's largest missile maker, are among 900 defense exhibitors at International Defense Exhibition, the largest military fair in the Arab world, being held this week in Abu Dhabi, United Arab Emirates.

Concern that Iran's nuclear program may lead to military action in the region ``is part of the broader environment that is causing more interest'' in defense orders, Paul Mikolashek, Middle East president of Waltham, Massachusetts-based Raytheon, said in an interview at the exhibition yesterday.

The Gulf monarchies, also including Bahrain, Kuwait, Oman, Qatar and the U.A.E., earned $500 billion in oil revenue in 2006, according to the International Monetary Fund. The countries announced a joint program Dec. 10 to study nuclear technology for power generation, a move that came as the United Nations Security Council pressured Iran to stop producing enriched uranium that could potentially be used in atomic weapons.

`Increasing Instability'

``Increasing instability throughout the region as well as the types of threats that are present from various terrorist groups and state actors is propelling an arms race in the Middle East,'' Ted Karasik, senior political scientist at the Rand Corp. consulting company, said in a Feb. 15 telephone interview in Dubai, U.A.E.

Forecast International, a Newtown, Connecticut-based research and data company, said Dec. 13 that Middle Eastern governments including Israel, Iran and Egypt may spend about $86 billion combined on defense equipment in each of the next two years as concern mounts over domestic and regional unrest. Iran has repeatedly said its nuclear research program is strictly for power generation and has no military aims.

``The Middle East market is one of the biggest for the defense industry, with average annual purchases of $10 billion- $15 billion by the Gulf states and I expect the same in sales 2007,'' said Riad Kahwaji, founder and director of the Institute for Near East & Gulf Military Analysis in a telephone interview from his Dubai headquarters.

Upgrading Patriot Systems

Raytheon is at the show marketing missile-defense equipment such as the Patriot, which intercepted Iraqi missiles aimed at Israel and Saudi Arabia during the 1990-1991 Gulf War. Saudi Arabia is in talks with Raytheon about upgrading its Patriot systems, Mikolashek said.

``The Middle East is a growing market,'' Raytheon's Mikolashek said. The company wants to boost sales of $500 million in the region by 10 percent, he said.

Military officials at the show are also showing an increased interest in pilotless aircraft, said Guenter Schaub, sales director for military air systems at European Aeronautic, Defence & Space Co., without providing figures. Paris- and Munich-based EADS is Europe's biggest aerospace company and the owner of Airbus SAS, the world's largest maker of commercial aircraft.

Saudi Arabia, which maintains the biggest air force among Arab monarchies in the Persian Gulf, is expecting to take delivery of 72 Eurofighter jets in a contract valued at least 10 billion pounds ($19.6 billion), Crown Prince Sultan bin Abdelaziz al-Saud said Jan. 6. Eurofighter GmbH is a joint venture of BAE, EADS and Finmeccanica SpA.

``We have an agreed delivery schedule with the Royal Saudi Air force and we are in process of planning for those deliveries,'' Mike Rouse, BAE's marketing director, said at the Abu Dhabi show. ``They do include fairly rapid deliveries of aircraft.''

The Middle East market accounted for between 18 percent and 20 percent of BAE's sales last year, said Simon Keith, the company's managing director for region.

To contact the reporter on this story: Massoud A. Derhally in Dubai, United Arab Emirates, at mderhally@bloomberg.net.

Last Updated: February 19, 2007 09:24 EST