HUNDREDS of jobs and millions of pounds of investment hang in the balance following speculation the Government might scale back plans for two new aircraft carriers.

The North-East had high hopes that 5,000 jobs and £1bn in contracts could be created through contracts for the Ministry of Defence aircraft carrier project.

But those hopes were thrown into turmoil amid reports that the MoD's required ships would cost £1.2bn more than the projected cost of £2.8bn.

The project has been mired in controversy since the Government put the contract out to tender, with BAE Systems and Thales fighting to build the ships.

BAE was chosen as lead contractor, but was ordered to work alongside Thales to construct the French firm's design.

The two companies were asked to cost the project and leaks to the Financial Times revealed that exercise identified the projected shortfall.

The paper said that, with no additional funds available for the project, planners had been asked to look at designing two smaller, less sophisticated ships, carrying as few as 20 aircraft rather than the 48 that had originally been envisaged.

It is not the first time that BAE Systems has failed to live up to its promises.

The taxpayer was left to pick up a £700m bill in March to fund cost overruns on both the Nimrod and Astute submarines programmes.

BAE was ordered to pay an extra £750m in costs.

Northern Defence Industries (NDI) has fought to bring as much work as possible on the future aircraft carriers to the North-East.

But David Bowles, NDI chief executive, said a scaled-down version would not affect the workload the region could expect to carry out.

"I do not think it will have a huge effect on the number of jobs," he said.

He said the problem might even benefit shipbuilder Swan Hunter.

He said: "The North-East is going to do pretty well out of this because Swan Hunter has the capability to build this on time and on budget.

"It has a good record of doing this.

"I do not think the MoD is in any mood to have overruns on any project at the moment, not just the aircraft carrier," he said.

The MoD denied that it was planning to change to a "cut-down" carrier force.

A spokesman said: "Various options are being investigated as a routine part of this process and nothing will be fixed until the major investment decision is taken next year, with the award of the demonstration and manufacturing contract."