The United States Defence Security Co-operation Agency notified Congress it had approved a potential deal worth up to $US506 million ($A751 million) overnight.

The Australian government requested up to 63 long-range guided missiles and up to 20 air training missiles as well as training dummy missiles and support equipment.

“It is vital to the US national interest to assist our ally in developing and maintaining a strong and ready self-defence capability,” the agency said in a statement.

A new lethal drone could also be in production locally in the next three years as the Australian Defence Force ramps up its capabilities to prepare for heightened tensions in the Pacific.

The ABC is reporting the unmanned drone will be unveiled by BAE Systems Australia at the Avalon Air Show as defence chiefs focus on air power.

The drone is reportedly small enough to fit in a shipping container but will still be able to carry deadly payloads of 100 kilograms.

The air show has brought almost 800 companies from more than 50 countries to Victoria to show off new cutting-edge defence technology.

Defence Minister Richard Marles said the air show is “a truly remarkable display of air and space capabilities”.

“In the Indo-Pacific, China is driving the largest conventional military build-up we’ve seen anywhere in the world since the Second World War and much of this build-up is opaque,” he said.

Marles branded 2023 a “consequential year for defence” as the government prepares to unveil the findings of a defence force review and announce a pathway to acquiring nuclear powered submarines.

“Fundamental to a step up in Australia’s defence capability is deterrence, so that no state will ever conclude the benefits of conflict outweigh the risks,” he said.

The defence strategic review will be released in April.

-AAP