Iarnrod Eireann has terminated a controversial rail signalling contract that is the subject of an Oireachtas inquiry.

Litigation is now considered likely after the State company moved on Thursday to end its arrangements with Dublin firm Modern Networks Ltd (MNL) and the British-based company, Alstom.

It is thought the parties will initially enter an arbitration process.

Signed in July 1997, the contract was projected to spend £14 million (#17.8 million) on the Mini CTC signalling system. This was designed to replace old signalling on the rail network.

But a study last year by PricewaterhouseCoopers said the cost of the uncompleted project was likely to rise to £25-£40 million.

That report also revealed that four Iarnrod Eireann employees left the rail company after the contract was signed to join MNL, which went into examinership on June 11th.

The study attributed part of the cost increases to work on a telecoms network laid along the railway for Esat Telecom, the company established by the businessman Mr Denis O'Brien.

It also said the contract failed to meet any of Iarnrod Eireann's procurement objectives.

It is understood Iarnrod Eireann has already paid £16 million for the electronic system, which still requires an additional 130 km of cable-laying and physical connection with each station on the network.

The company notified MNL and Alstom three weeks ago that its engineer had concluded the contractors were not executing work in accordance with the contract.

The notification followed a written warning.

MNL laid off 27 signalling staff this week.

When applying to the High Court for examinership, it said it could not pay its debts because Iarnrod Eireann had failed to pay it £2 million.

The contract is being investigated by the Oireachtas Joint Committee on Public Enterprise and Transport, which will compel witnesses to appear at hearings this autumn.

The last time a committee held such an inquiry was in 1999, when the Committee of Public Accounts examined large-scale evasion of DIRT.

Iarnrod Eireann has said the existing signalling system can operate safely, but consultants monitoring a major rail safety programme in the company have expressed concern about the postponement.

A draft of the latest safety audit by British group International Risk Management Services said a means of getting the project back on track was a matter of urgency.

Seen by The Irish Times, it said: "[Mini CTC] would have eliminated signalling infrastructure in poor condition, replacing it with a modern, efficient signalling system.

"The postponement of the project continues to cause major problems for the engineers faced with the task of maintaining worn-out equipment.

"The provision of a specific signalling maintenance system to address the postponement together with active safety monitoring, which has been introduced in some areas, mitigates the risk of accidents but cannot in itself prevent further deterioration of the infrastructure."