Prosecutors dropped an illegal-arms case against a retired Israeli army general and 10 other people after the defendants argued the United States wouldn't have frowned on $2 billion in U.S. weapons sales to Iran.

A probe by the U.S. attorney's office found no evidence linking the arms transactions charged in the indictment with the so-called Iran-Contra affair, court papers said.However, the defendants argued they had reason to believe their activities had or would receive U.S. government approval, a contention that gained credence after the Iran-Contra arms scandal came to light.

The defendants said they believed their plan to sell fighter planes, missiles, tanks and spare parts to Iran was officially sanctioned by the U.S. government, according to papers filed in U.S. District Court.

Prosecutors could not produce witnesses to contradict the defendants' claim so the conspiracy case was dropped Wednesday.

Gen. Avraham Bar-Am, who left the Israeli army in 1984 and later served as an arms consultant for Israel, and Samuel Evans, an American lawyer based in London, were among the 11 people and four corporations named in the papers. They were indicted between May and October 1986.

Evans also was the lawyer for Adnan Khashoggi, a multibillionaire Saudi arms dealer who was said to have been involved in some of the Iran-Contra weapons deals.

The U.S. Customs Service had set up an elaborate "sting" using a fraudulent bank account in late 1985, about the time Reagan administration officials were selling arms to Iran and using the proceeds to finance the Contras fighting to overthrow the Nicaraguan government.