By Sophie Walker

LONDON, April 29 (Reuters) - Britain's decision to drop a corruption investigation into a multi-billion pound defence deal with Saudi Arabia has been a blow to its image, a parliamentary committee said on Sunday.

British investigators dropped the probe last December after the government warned it could undermine national security. The reversal followed reports Saudi Arabia had threatened to cancel orders for 72 Eurofighter Typhoon jets from BAE Systems <BA.L>.

"The government's decision to halt the inquiry into the al Yamamah arms deal may have caused severe damage to the reputation of the United Kingdom in the fight against corruption," the House of Commons' Foreign Affairs Committee said in its annual report on human rights.

Prime Minister Tony Blair has made combating corruption and promoting good governance a central plank of his plan to promote development in Africa and has come under fire over the decision to shelve the Saudi investigation.

Arms sales to Saudi Arabia represent the biggest export deals in British history and the risk to the latest, worth an estimated 10 billion pounds, threatened thousands of jobs.

Britain's Serious Fraud Office spent two years probing suspected accounting irregularities related to BAE in 2004, before abruptly dropping it.

The committee asked the government to explain what it had done since the decision to maintain momentum on international anti-corruption measures.

It asked for information about how the government had responded to criticism by the Paris-based Organisation for Economic Cooperation and Development (OECD) that London had not acted in accordance with the OECD anti-bribery convention.

The committe urged the government to use its close relationship with Saudi Arabia to set "measurable and time-limited targets" for eradicating human rights abuses.

It said the government should focus particularly on women's rights and the use of torture and the death penalty.

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