UPDATE 2-Obama seeks record $708 bln in 2011 defense budget
* Veto urged if Congress adds funds for scrapped programs
* Gates ousts Pentagon F-35 program manager
* Lockheed docked performance fees for F-35 problems (Adds comment from Lockheed Martin, 24th paragraph)
WASHINGTON, Feb 1 (Reuters) - President Barack Obama asked Congress to approve a record $708 billion in defense spending for fiscal 2011, but vowed to continue his drive to eliminate unnecessary, wasteful weapons programs.
The budget calls for a 3.4 percent increase in the Pentagon's base budget to $549 billion, plus $159 billion to fund U.S. military missions in Iraq, Afghanistan and Pakistan.
Obama's spending freeze on other parts of the budget, designed to rein in the deficit, did not apply to the military.
"Even though the Department of Defense is exempt from the budget freeze, it's not exempt from budget common sense," Obama told reporters at the White House.
He said the fiscal 2011 budget proposal included cuts of "unnecessary defense programs that do nothing to keep us safe," including annual spending of $2.5 billion for C-17 transport planes built by Boeing Co (BA.N) that has been added to the federal budget by Congress in each of the past four years.
"It's waste, pure and simple," Obama said.
At the Pentagon, Defense Secretary Robert Gates announced a major shake-up of Lockheed Martin Corp's (LMT.N) F-35 fighter -- at $300 billion the largest weapons program in history.
Gates also said he would strongly recommend a veto of any moves by Congress to keep alive the C-17 program or a second engine for the F-35.
He said it was "important to take a final stand" against lawmakers and ensure those programs were eliminated.
Cutting the alternate engine program would save $465 million in fiscal 2011, which begins Oct. 1, and more than $1 billion longer-term, according to Pentagon documents.
The engine is being developed by General Electric Co (GE.N) and Britain's Rolls-Royce (RR.L) as an alternate to the main engine built by Pratt & Whitney, a unit of United Technologies Corp (UTX.N).
Obama and Gates tried to kill both programs last year, but lawmakers revived them during the budget process.
PLANNING FOR THE UNEXPECTED
Gates said the 2011 budget and related strategy reviews were "shaped by a bracing dose of realism" about risks and resources, noting that programs already cut in 2010 would have cost taxpayers $330 billion.
The new budget built on those decisions, Gates said, adding the determinations were strengthened by the Quadrennial Defense Review, which is completed once every four years.
"The department's leadership now recognizes that we must prepare for a much broader range of security challenges on the horizon," Gates said, pointing to sophisticated new technologies being developed by enemies overseas, threats posed by militant groups, and other unexpected scenarios.
"We have learned through painful experience that the wars we fight are seldom the wars we planned," he said, saying the U.S. military needed versatile capabilities to prepare for future threats.
Overall, the budget includes $112.8 billion for weapons procurement, up from $104.8 billion in fiscal 2010, and $76 billion for research and development, down from $80 billion.
The Pentagon's budget also kills plans for development of a new Navy cruiser, scraps plans to replace the Navy's EP-3 intelligence aircraft and halts work on a missile early-warning satellite, opting instead to upgrade the Space Based Infrared System satellite being developed by Lockheed.
The budget proposal also calls for a delay in replacing two new Navy command and control ships until after 2015, a move the White House said would save $3.8 billion across the Pentagon's five-year defense plan. The Navy had planned to buy one command ship in 2012, and a second one in 2014.
Procurement of a new amphibious vehicle being built by General Dynamics Corp (GD.N) for the Marine Corps would be delayed by one year, saving $50 million in fiscal 2011 and cutting risk by allowing more time for testing.
The budget includes $25 billion for shipbuilding programs; $9.9 billion in continued funding for ballistic missile programs; $9.6 billion for new helicopters; and about $4 billion for long-range strike programs.
The budget also includes nearly $11 billion for the F-35 program, including plans to buy 43 planes under a revamped strategy to "stabilize its cost and schedule." Gates said the Pentagon could buy even more planes in fiscal 2011, depending on contractor performance.
He said he was docking Lockheed $614 million in performance fees because the program's progress and performance had not met expectations over the past two years.
Chris Geisel, a spokesman for Lockheed's F-35 program, said the company had been working with Gates on a plan to get the program on track and was "committed to stabilizing the F-35 cost, affordability and to fielding the aircraft on time."
Gates said the Pentagon also bore responsibility for the program's "troubling performance record," so he was replacing the Pentagon's manager in charge of the program, Major General David Heinz, a two-star general, with a three-star officer. Gates did not name the new program manager.
The budget also pays for more unmanned planes, helicopters, electronic warfare capabilities and cybersecurity measures. (Reporting by Andrea Shalal-Esa; Editing by Lisa Von Ahn and Tim Dobbyn)