By Lidia Kelly and Gus Trompiz
MELBOURNE/PARIS (Reuters) -Australia has made a "huge" diplomatic error by ditching a multi-billion-dollar order for French submarines in favour of an alternative deal with the United States and Britain, France's envoy to Canberra said on Saturday.
Canberra announced on Thursday it would scrap its 2016 deal with France's Naval Group to build a fleet of conventional submarines and instead build at least eight nuclear-powered ones with U.S. and British technology after striking a trilateral security partnership nL1N2QH2X7.
The move caused fury in France, a NATO ally of the United States and Britain, prompting it to recall its ambassadors to Washington and Canberra, and also riled China, the major rising power in the Indo-Pacific region.
Malaysia said on Saturday that Canberra's decision to build atomic-powered submarines could trigger a regional nuclear arms race, echoing concerns already raised by Beijing.
"It will provoke other powers to also act more aggressively in the region, especially in the South China Sea," the Malaysian prime minister's office said, without mentioning China.
Beijing's foreign policy in the region has become increasingly assertive, particularly its maritime claims in the resource-rich South China Sea, some of which conflict with Malaysia's own claims.
"This has been a huge mistake, a very, very bad handling of the partnership - because it wasn't a contract, it was a partnership that was supposed to be based on trust, mutual understanding and sincerity," France's Ambassador Jean-Pierre Thebault told reporters in Canberra before returning to Paris.
France has previously branded the cancellation of the deal - valued at $40 billion in 2016 and reckoned to be worth much more today - a stab in the back nL1N2QI002.
Foreign Minister Jean-Yves Le Drian later described the row as a "crisis" in France's relations with the United States and Australia.
"There has been duplicity, contempt and lies - you can't play that way in an alliance," he told France 2 television.
U.S. State Department spokesperson Ned Price said France was a "vital ally" and that the United States would work in the coming days to resolve the differences.
Analysts say that even if U.S. officials hope the crisis will blow over quickly, it could do lasting damage to Washington's alliance with France and Europe and throws into doubt the united front that the Biden administration has been seeking to forge against China's growing power.
Australia said it regretted the recall of the French ambassador and that it valued the relationship with France and would keep engaging with Paris on other issues.
"Australia understands France's deep disappointment with our decision, which was taken in accordance with our clear and communicated national security interests," a spokesperson for Foreign Affairs Minister Marise Payne said on Saturday.
Thebault said he was very sad to have to leave Australia but added there "needs to be some reassessment" of bilateral ties.
In separate comments made to SBS radio, Thebault said of the ditched agreement: "It was not about selling salads or potatoes, it was a relationship of trust at the highest level covering questions of the highest level of secrecy and sensitivity."
The row between Paris and Canberra marks the lowest point in their relations since 1995, when Australia protested France's decision to resume nuclear testing in the South Pacific and recalled its ambassador for consultations.
Public opinion in France, where President Emmanuel Macron is expected to seek a second term in an election due next year, has also been very critical of Australia and the United States.
"You can understand for geopolitical reasons Australia getting closer to other anglophone countries like the United States and Britain," said Louis Maman, a Parisian surgeon out for a stroll on Saturday on the Champs-Elysees.
"But there was a real contract and I think there was an alliance and a friendship between Australia and France. It's spoiling a friendship," he said. "I took it as a betrayal."
(Reporting by Lidia Kelly and Stefica Nicol Bikes in Australia, Gus Trompiz and Ardee Napolitano in Paris; Editing by Gareth Jones and David Clarke)