British diplomats feared Israel would use nuclear weapons in the event of another war with its Arab neigbours, secret files released Thursday showed.

In 1980, British officials were concerned that Israel could be heading for a new conflict, despite signing a peace treaty with Egypt the year before, according to official papers released from the National Archives after being kept secret for 30 years.

"The situation in the region is deteriorating and with it Israel's dangerous mood of isolation and defiance will grow," warned a cable from the British embassy in Tel Aviv, dated May 4.

"If they (Israel) are to be destroyed they will go down fighting this time. They will be ready to use their atomic weapon. Because they cannot sustain a long war, they would have to use it early."

Israel has never confirmed or denied reports that it has produced nuclear warheads.

The files also showed how prime minister Margaret Thatcher, elected to office the year before, found Middle East diplomacy exasperating.

She confided in then French president Valery Giscard d'Estaing that she "had never had a more difficult man to deal with" than Israeli prime minister Menachem Begin.

She had also tried to tell Begin that his policies towards Jewish settlement building on the West Bank were "unrealistic" and "absurd".

"His response was that Judea and Samaria had been Jewish in biblical times and that they should therefore be so today," she told Giscard d'Estaing.

Thatcher was also unimpressed by Foreign Office attempts to persuade her that the Palestine Liberation Organisation should not be seen as a "purely terrorist organisation", but also as a political movement.

"This analysis just doesn't stand up. It is riddled with inconsistencies," she scrawled on one briefing paper.

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