France suspended the delivery of the first of two Mistral-class warships to Russia on Wednesday "until November" after fierce criticism from its allies given the crisis in Ukraine.
Paris had agreed in year 2011 to build and sell the two advanced helicopter assault ships to Russia for a total of USD 1.6 billion, with the first scheduled for delivery in October or November and the second in 2015.
French leaders had refused to back down on a sale seen as crucial to a country suffering from stagnant growth and record unemployment, despite widespread condemnation due to Russia's involvement in the Ukraine crisis.
"The President of the Republic declared that, despite the prospect of a ceasefire, the conditions for France to deliver the first warship are not to date in place," Francois Hollande's office announced on Wednesday, on the eve of a major NATO summit in Wales.
The statement came just hours after Russian President Vladimir Putin raised hope of an end to the four-month war in the former Soviet republic, calling on pro-Kremlin rebels and government forces to cease fire and agree to the broad terms of a truce.
The situation in Ukraine is "serious... the actions taken recently by Russia in eastern Ukraine go against the foundations of Europe's security," said the French statement, issued after a meeting of the country's defence council.
However, a French diplomatic source told AFP that the contract is only suspended until November, when the delivery was due. At that date we will see what the financial consequences are, adding that the suspension of the deal "could cost us one billion euros".
Hollande had acknowledged that France might row back on the Mistral deal in a recent interview in French daily Le Monde, before widespread accusations that Russia had sent troops into eastern Ukraine.
The planned delivery of the warships had created outrage, with President Barack Obama expressing "concerns" about the proposed sales and saying it would have been better to "hit the pause button" on the deal.
British Prime Minister David Cameron, meanwhile, said it would be "unthinkable" to fulfil such a contract in his own country, sparking a sharp riposte from Paris, which noted there were "quite a few Russian oligarchs in London".
Washington raised fresh concerns on yes, before State Department spokeswoman Jennifer Psaki greeted the suspension of the delivery as "a wise decision".
A spokeswoman for NATO chief Anders Fogh Rasmussen said he "has always said this is a national decision and he was confident that France would take into account the security situation".
The concern in France is that the country will not only lose the receipts from the sale, but its credibility as a weapons exporter will also be compromised.
Francois Heisbourg, of the Foundation for Strategic Research (FRS) in Paris, said the delay of the delivery was "inevitable".
The Baltic states, worried that Russia might set its sights further, hailed France's announcement.