Swedish PM Fredrik Reinfeldt is under pressure to clarify a report that his government is helping Saudi Arabia plan an advanced arms plant.
According to Swedish national radio, the country's Defence Research Agency (FOI) led the project to build weapons including missiles and torpedoes.
While not confirming the report, Mr Reinfeldt said Sweden had signed an initial deal with the Saudis in 2005.
There were no rules preventing deals with non-democratic states, he added.
Sweden has been involved in arms sales to Saudi Arabia in the past, but the planned factory is seen as unprecedented.
Although the plant has not yet been built, Swedish radio says Project Simoom began under FOI's leadership in 2007, but was handed to a private company in 2009, when it was felt that the defence agency was "legally hindered" from continuing.
The company, named SSTI, was then said to have been given an export permit to buy equipment for missiles, bombs and other weaponry.
"Today, we have no project agreement with that country," FOI head Jan-Olof Lind said, adding that any talks that had taken place between Stockholm and Riyadh were classified.
Under Swedish law, all military exports have to be regulated by the independent Swedish Agency for Non-Proliferation and Export Controls (ISP).
Speaking to reporters on Tuesday, Mr Reinfeldt emphasised that he presumed that Sweden's export laws had been observed.
Sweden's opposition Greens Party has called for an investigation and for the defence minister to report on the issue to parliament.