UPDATE 1-Alternate F-35 engine dropped from US Senate bill

* Second Obama victory this week on defense

* $680 billion defense bill clears Senate

(Updates with passage of bill, analyst comment, background)

By Andy Sullivan

WASHINGTON, July 23 (Reuters) - The U.S. Senate on Thursday handed President Barack Obama another victory on defense spending when it stripped funding for an alternate fighter-jet engine the Pentagon has said it does not want.

On a voice vote, the Senate removed $439 million to develop the second engine for Lockheed Martin Corp's (LMT.N) F-35 Joint Strike Fighter from a $680 billion defense bill.

The Senate later passed the bill, which sets military spending priorities, by a vote of 87 to 7.

The vote is a blow to General Electric Co (GE.N) and Rolls-Royce Group PLC (RR.L), which had been developing the engine before Defense Secretary Robert Gates asked Congress to stop funding it earlier this year.

The vote does not necessarily kill the program as two committees in the House of Representatives have supported it.

The House and Senate must resolve any differences they have in a final military defense bill before they can send it to Obama to sign into law.

"The funding battle ... is far from over," GE official Rick Kennedy said in an e-mail message after the vote.

But Bernstein Research analysts wrote to investors that it "appears highly unlikely" that the program will continue.

Obama, who faces increasing public unease over a record $1.8 trillion budget deficit, had threatened to veto the defense bill if it contained funding for the alternative engine.

Pratt & Whitney, a unit of United Technologies Corp (UTX.N), is the builder of the main F-35 engine.

Obama had also threatened a veto if Congress continued to fund production of the F-22 fighter jet, which the Pentagon also no longer wants. The Senate stripped $1.75 billion in funding for the radar-dodging fighter on Tuesday, but the money remains in several House bills.

Gates has sought to overhaul the Pentagon's weapons systems as the U.S. military tries to provide resources to fight insurgencies like those in Iraq and Afghanistan.

Gates said in a letter on Wednesday the second engine was not necessary and was likely to slow down progress of the overall F-35 program.

The overall defense authorization bill includes $550 billion for military operations and $130 billion for the wars in Afghanistan and Iraq for the fiscal year starting Oct. 1.

It authorizes the U.S. Army to expand its strength by 30,000 troops over the next three years. Gates said on Monday the army will boost its force by 22,000 troops for three years to cope with the strains of the wars in Afghanistan and Iraq.

The bill includes an amendment that expands hate-crime protection to gays and lesbians in the United States. (Additional reporting by JoAnne Allen and Susan Cornwell; editing by Anthony Boadle)