ANKARA (Reuters) - Turkish defense technology company Baykar delivered 20 armed drones to the United Arab Emirates this month and could sell more, two Turkish sources said, as diplomatic ties between the two former regional foes improve to allow for military contracts.

International demand for the Baykar drones has soared after their impact in the conflicts in Syria, Ukraine and Libya, where its armor-piercing laser-guided bombs helped repel an attack by UAE-backed forces two years ago.

The civil war in Libya was one of several arenas where the two countries fought a bitter, decade-long battle for influence in the Middle East, before they reconciled last year.

Military sources say the UAE and its Saudi ally are now hoping to take advantage of their rapprochement with Turkey to counter the growing security challenge from Iran and the proxy forces acting in its favour.

The two Gulf countries were subjected to drone attacks on cities and oil facilities, which the Houthi militants allied with Iran in Yemen accused of launching.

A source familiar with the talks said that Abu Dhabi and Riyadh are negotiating to obtain drones (Bayraktar TB2) from Ankara. "It was decided during negotiations with the UAE to quickly deliver 20 armed drones," the source said, adding that they were transferred earlier this month.

A senior Turkish official confirmed that his country had delivered some drones to the UAE, which is requesting more. The official said that Saudi Arabia also wants to buy armed drones and establish a factory to produce them.

The official said that Baykar is studying the Saudi request to establish a factory, but he made it clear that the strategic decision belongs to President Recep Tayyip Erdogan and that there are other issues, such as Saudi investments in Turkey, "not moving as quickly as possible."

Baykar, the UAE foreign ministry, and the Saudi government communications office did not respond to a request for comment. The Turkish Defense Ministry referred questions to the state defense industry group, which declined to comment.