GE sees news on F-35 engine issue by end October

* Engine testing still halted

* Lug nut came loose

WASHINGTON Oct 20 (Reuters) - General Electric Co (GE.N) and Britain's Rolls Royce Group PLC (RR.L) on Tuesday said they expected news by the end of the month on how to deal with a lug nut that came loose in the companies' alternate F-35 fighter engine, and whether the issue required a design change.

General Electric and Rolls Royce earlier this month halted testing on the developmental F-35 engine after damage was found to some turbine blades.

GE spokesman Rick Kennedy said the damage was caused by a lug nut that came loose in a diffuser that directs air into the engine's combuster.

He said Rolls Royce, which made the part, was still investigating whether the problem resulted from a one-off quality issue or whether it required a design change.

Testing remained halted until the issue was resolved, he said. The companies did not want to risk damage to the next two engines that were due to begin testing.

"It's a very tiny little piece that had gone free," he said, noting that taking apart the engine was time-consuming since it included some 2,000 sensors needed for testing.

"We should know by the end of the month exactly what we need to do next," he said. Developing an action plan could take weeks or months, depending on whether a design change was needed, he said.

Lockheed Martin Corp (LMT.N) (LMT.N) builds the F-35. Pratt & Whitney, a unit of United Technologies Corp (UTX.N), builds the plane's main engine, but Congress has continued to fund a second engine being developed by General Electric and Rolls.

Both engines have had sporadic problems, and the companies say that is a normal part of the process of developing such complicated fighter engines.

Last month, a fan blade tip broke in testing of Pratt's engine, but the company said the needed modifications were minor and would not result in much disruption to cost or the engine's testing schedule. (Reporting by Andrea Shalal-Esa; Editing by Gary Hill)