Cost of U.S.-Japan missile defense effort up sharply

* Cost overrun due to cancellation of a separate program

* $700 mln extra mainly due to cancellation

* Strong international interest

* Raytheon may get fees docked for missile test failure

By Andrea Shalal-Esa

WASHINGTON, Aug 3 (Reuters) - A joint U.S.-Japanese missile defense program being built by Raytheon Co (RTN.N) is now slated to cost $3.1 billion, $700 million more than expected, mainly due to a Pentagon decision to cancel a separate program, a top military official said on Monday.

U.S. Rear Admiral Brad Hicks, program director of the Aegis sea-based leg of an emerging U.S. anti-missile shield, said the Standard Missile 3 Block IIA ballistic missile interceptor being developed by Raytheon jointly with Japan would be a "game-changer" for the military.

Sailors had nicknamed the missile "the Beast," he said.

North Korea's test-firing of a ballistic missile over Japan in August 1998 spurred Tokyo to become the most active U.S. ally in building a layered shield against missiles that could be tipped with chemical, biological or nuclear warheads.

Hicks said the new SM-3 IIA missile, slated to fly in 2014, would make it possible for one ship -- instead of three -- to protect Japan from enemy missile attacks. The missile could even be placed on land, if needed.

Hick described the cooperation with Japan as "the gold standard" and cited growing international interest in similar deals. He said other agreements could emerge once the Pentagon signed off on its missile defense efforts as part of a major defense review that is due to wrap up in late summer.

The program with Japan was running under an aggressive schedule and costs had clearly gone up, but Hicks told an event hosted by the Marshall Institute in Washington that he remained confident that the development program would be successful.

He said Washington would cover the cost overrun under the 50-50 development program since the United States was responsible for the kill vehicle, the source of the increase.

He said the increase stemmed mainly from the Pentagon's decision in the fiscal 2010 budget proposal to cancel Lockheed Martin Corp's (LMT.N) Multiple Kill Vehicle program, which had an impact on technology being developed for the SM-3 IIA missile.

He said initial cost estimates were based on initial cost projections, but the latest estimates were more conservative and based on far more robust data.

Hicks said the overall Aegis program had proven its capability over the last few years, particularly when it was used in February 2008 to destroy a dead classified U.S. satellite that was falling out of orbit.

He said the Navy now had 18 ships deployed with ballistic missile defense capability, and another one would be available in a couple of months. Military commanders, concerned about increased missile development activity by Iran and North Korea, were constantly clamoring for more capability, he said.

The fiscal 2010 budget included funding to bring the number of Aegis ships to 27, equipped with some 218 SM-3 missiles, Hicks said, adding that his goal was to see those additional ships fielded "no later than" 2012.

Hicks said Raytheon could face some financial consequences for a bad interceptor that resulted in the failure of a November 2008 missile test with Japan, but gave no details.

He said the Missile Defense Agency would have discussions soon with Raytheon about the issue, but said the company's performance overall had been "OK" and it was delivering interceptors ahead of schedule.

He said a review had concluded the interceptor problem was a one-off event linked to a "bad day on the production line," not a systemic problem affecting other interceptors. (Reporting by Andrea Shalal-Esa; Editing by Phil Berlowitz)