Australian Prime Minister Malcolm Turnbull on Wednesday defended a decision to build a A$50 billion ($40 billion) submarine fleet in partnership with France in Australia, rather than opt for a faster build that would have seen initial work offshore.

Turnbull said Australia planned to sign a full contract with France's DCNS Group by the end of the year after announcing that the state-owned naval contractor beat bidders from Japan and Germany to win one of the world's most lucrative defence contracts. (Full Story)

Turnbull acknowledged that doing the build entirely in Australia, rather than allowing DCNS to begin construction in France, would cost more, "but it's not the huge figure people have speculated about."

"It is critically important that with a sovereign defence capability we have the skills in Australia to build it, to maintain it and sustain it," he told Australian Broadcasting Corp radio.

"It is important that it is built in Australia, it's a matter of national security."

The victory for state-owned naval contractor DCNS Group underscored France's strengths in developing a compelling military-industrial bid, and is a blow for Japanese Prime Minister Shinzo Abe's push to develop defence export capabilities as part of a more muscular security agenda.

Japan's government with its Mitsubishi Heavy Industries 7011.T and Kawasaki Heavy Industries 7012.T boat had been seen as early frontrunners for the contract, but their inexperience in global defence deals and an initial reluctance to say they would build in Australia saw them slip behind DCNS and Germany's ThyssenKrupp AG TKAG.DE.

DCNS' share of the overall contract to build 12 submarines will amount to about 8 billion euros ($9.02 billion), according to sources with knowledge of the deal.

DCNS chief Hervé Guillou said the deal would create about 4,000 French jobs, benefiting shipyards and industrial sites in Lorient, Brest, Nantes and Cherbourg.

Australia is ramping up defence spending, seeking to protect its strategic and trade interests in the Asia-Pacific region as the United States and its allies grapple with China's rising power.