Spending Review: Talks over defence cuts 'nearly completed'

About 20,000 Army personnel are set to lose their jobs by 2020 in a major re-organisation

Negotiations over cuts to the defence budget ahead of the spending review later this month are close to being completed, the BBC understands.

A source close to the defence secretary has told the BBC that "we are nearly there" and predicted an agreement with the Treasury in the next week.

Philip Hammond has publicly warned he will not cut defence "capabilities".

Chancellor George Osborne has already agreed cuts of up to 10% with seven government departments for 2015-6.

The Ministry of Defence is among a number of other departments - including Business, Transport, the Home Office and the Environment - yet to reach a settlement.

But with funding for hospitals, schools and international aid all protected by the coalition, the remaining areas are expected to have to reduce spending by between 8% and 10%.

Mr Hammond has denied he is "holding out" against further cuts to the defence budget but has warned there is a difference between efficiency savings and changes which will affect frontline operations.

In an interview earlier this month, he said his department was already squeezing spending "aggressively".

Britain currently spends around £34bn a year on defence but major reductions in troop numbers are already taking place. About 20,000 Army personnel are set to lose their jobs by 2020 as numbers are cut to about 82,000.

Ministers have pledged to increase spending on military equipment after 2015 but cuts are expected elsewhere.

The BBC's Political Editor Nick Robinson said he understood that following an efficiency review carried out by the Cabinet Secretary Sir Jeremy Heywood, the Ministry of Defence has now agreed to make savings by, for example, renegotiating private finance initiative contracts to take advantage of lower interest rates and maintenance contracts.

Mr Osborne has called for further belt-tightening in Whitehall, on top of the billions being cut from departmental budgets between 2011 and 2015, as he tries to get to grip with the deficit in the public finances.

Labour have said the government's austerity drive is failing and warned of potential capability gaps in defence.