Israel's defence minister is dropping the purchase of US V-22 Osprey aircraft, raising concerns that this could further chill already frosty relations with Washington, Israel Hayom daily said Thursday.

The mass-circulation freesheet, considered close to Prime Minister Benjamin Netanyahu, said Moshe Yaalon's decision went against the Israeli military's wishes.

The paper linked the move to budget constraints, lessons learned from the 50-day summer war in the Gaza Strip and the recent conclusion of an agreement to buy a second batch of costly Lockheed Martin F-35 stealth fighters.

The V-22 Osprey is an advanced vertical takeoff and landing transport aircraft.

Israel Hayom said the planned purchase of six Ospreys would have made Israel the first country outside the United States to deploy them.

Following the Gaza offensive, Yaalon chose to produce more home-built Namer (Leopard) heavy armoured personnel carriers and increase stocks of precision munitions, the paper said.

"Some are concerned that against the backdrop of rattled Israel-US relations the decision to cancel the purchase will anger the US administration," the paper's English-language website wrote.

"Yaalon will have to make the case to the US that his decision was made objectively and based on national interests alone."

Turbulent US-Israel ties plunged to new lows this week when an anonymous senior official in President Barack Obama's administration was quoted in The Atlantic magazine as calling Netanyahu "a chickenshit" interested only in preserving his own political skin.

Yaalon and US Defence Secretary Chuck Hagel met last week in Washington to a backdrop of fresh tensions between the allies over Israeli criticism of US foreign policy, Israeli announcements of settlement expansion and remarks by US Secretary of State John Kerry linking the growth of militant Islam to Israel's decades-long conflict with the Palestinians.

Kerry on Thursday hit out at the reported slur against Netanyahu, calling it "disgraceful, unacceptable and damaging".