UPDATE 2-Gates says Air Force to run U.S. tanker contest

* Air Force welcomes move

* Draft rules for competition close to release (Edits, adds Northrop statement, Pentagon details)

NATIONAL HARBOR, Md., Sept 16 (Reuters) - The U.S. Air Force will regain responsibility to pick an aircraft for a new aerial refueling fleet, U.S. Defense Secretary Robert Gates said on Wednesday, expressing confidence that the Air Force could handle the job this time around.

"Source selection is returning to the Air Force for the KC-X refueling tanker, with draft request for proposal to follow," Gates said in a speech at the annual Air Force Association meeting, drawing applause from the audience.

The move paves the way for the Air Force to release draft rules for its third attempt in eight years to replace an aging fleet of KC-135 airplanes. The military uses the planes as flying gas stations to extend the range of fighter jets and other planes by refueling them in mid-flight.

The Pentagon had assumed control over the program in July 2008 after government auditors upheld a Boeing Co (BA.N) protest against a projected $35 billion contract awarded in February of that year to Northrop Grumman Corp (NOC.N) and its European partner, Airbus parent EADS (EAD.PA).

The GAO faulted the Air Force for failing to follow its own rules in evaluating the rival bids.

Gates, who canceled the previous competition in September 2008, said his office would continue to have a "robust oversight role" in the competition.

"I don't need to belabor the importance of getting this done soon and done right," Gates said. "We are committed to the integrity of the selection process and cannot afford the kind of letdowns, parochial squabbles and corporate foodfights that have bedeviled this effort in the past."

Gates, who forced the resignation of the former Air Force leadership last June over nuclear mishaps and other issues, praised the leadership of their successors and said he relied heavily on the expert advice of senior Air Force leaders.

"I have confidence that the KC-X selection authority is in good hands with the service's leadership team of Secretary Donley and General Schwartz," Gates said.

Air Force Secretary Michael Donley welcomed the news moments after Gates spoke and said replacing aging KC-135 tankers remained the Air Force's No. 1 acquisition priority.

"The Air Force is pleased at today's announcement and the confidence Secretary Gates is placing in the Air Force," Donley said in a statement.

He said a draft request for proposals, or RFP, was close to release and would be given to the bidders "with ample time for discussions." Final rules for the competition would follow later this year, with a contract to be awarded in 2010.

Pentagon spokesman Bryan Whitman said today's news would not slow the process since the Air Force had been working closely with top officials in Gates' office all along.

"The only thing that was decided today was that the source selection official would come from the Air Force instead of the (Office of the Secretary of Defense)," he said.

Boeing said it looked forward to working with the Air Force on the competition. "Boeing is ready for the release of the draft request for proposal and will be looking for clarity in how the service's requirements will be defined and prioritized," said spokesman Bill Barksdale.

Boeing is waiting the see the draft rules before deciding whether to offer the Air Force a wide-body 767-based tanker or larger 777. Barksdale said either would offer "maximum capability at a lower cost than our Airbus competitor."

Northrop also welcomed the news, saying it was primed to compete again with its A330-based tanker and remained confident that it could win the competition once more.

"Northrop Grumman is pleased that a decision has been made and we are looking forward to competing and winning the tanker contract again," said spokesman Randy Belote.

Air Force Chief of Staff General Norton Schwartz said on Tuesday that the military was focused on ensuring the success of the third attempt to buy new aerial refueling planes, and that would prevail against any protests that might be filed against the winner.

"That will have a lot to do with many other things and people's perceptions of our competence," Schwartz said. "So we're taking that very, very seriously." (Reporting by Jim Wolf and Andrea Shalal-Esa; Editing by Lisa Von Ahn, Dave Zimmerman)