Israeli Prime Minister Benjamin Netanyahu
Saudi Arabia and Israel are in talks to establish economic ties REUTERS/Abir Sultan/Pool

Israel and Saudi Arabia are in talks to forge official economic ties with each other in a potential ground-breaking deal, according to reports.

US and Arab sources are claiming the two nations are hoping to develop relations with each other, starting with allowing Israel to set up business in Saudi Arabia and giving permission for Israeli airline El Al to use Saudi airspace in its flights, reports The Times.

The reports suggest the deal could explain why Saudi Arabia and its allies have recently cut ties with Qatar, suggesting it is an effort for the Gulf state to stop supporting Hamas, the Islamist Palestinian militants who control Gaza.

The reports have been dismissed by Saudi Arabia as "wishful thinking" from the Trump association.

Sources suggested the prospect of a deal between the two nations is merely the White House attempting to show immediate positive results from the president's recent trips to Saudi Arabia and Israel.

Trump has spoken about how he plans to oversee what he calls the "ultimate deal" in delivering peace talks between Israel and Palestine.

According to the Times, Palestinians are opposed to the idea, fearing it would normalise ties between Israel and Arab nations before a deal to establish a Palestinian state has been met.

In 2002, Saudi Arabia proposed allowing for a general recognition of Israel in return for a peace deal with the Palestinians and a withdrawal from the occupied territories. While the move was adopted by the Arab league, Israeli prime minister Binyamin Netanyahu never formally responded to the offer.