UPDATE 1-Northrop says it's nearing decision on tanker bid

* Air Force says Northrop appreciative of changes

* European source says EADS backing a new bid (Adds comments from Air Force secretary, European official, byline)

By Andrea Shalal-Esa and Tim Hepher

WASHINGTON/PARIS, March 2 (Reuters) - Northrop Grumman Corp (NOC.N) said on Tuesday it was still reviewing the Air Force's final terms for a multibillion-dollar aerial tanker competition but was "getting closer to a decision" on whether to submit a bid with its European partner EADS (EAD.PA).

"We continue to conduct a thorough review of the final RFP (request for proposals) and I will acknowledge that we are getting closer to a decision. However, we are deferring further comment until our analysis is completed," Northrop spokesman Randy Belote told Reuters.

He declined to comment on exactly when the company was likely to decide whether to submit a renewed bid.

Northrop and EADS won the last competition in February 2008 with an Airbus A330-based tanker plane, but the deal, valued at around $35 billion, was later canceled after government auditors upheld a Boeing Co (BA.N) protest.

Northrop told the Pentagon in December it would not submit a bid in this follow-on competition unless there were significant changes to the Air Force's draft rules, which it said clearly favored Boeing's smaller 767 airplane.

A European source said EADS, anxious to add to its defense portfolio and gain a bigger foothold in the United States, was backing a new bid despite its concerns over the possibility of being locked once again into a rigidly priced contract.

"It looks like (they) are going for it. EADS can't afford not to," said the source, who was not authorized to speak publicly.

EADS declined to comment.

Some of Northrop's backers in Congress last week said they thought the final terms released by the Air Force contained only minor changes and still appeared to favor Boeing, but said they were encouraging Northrop to submit a renewed bid given the large number of jobs the program would generate.

Pentagon officials insisted the revised rules would allow both teams to bid and win the winner-takes-all contest.

Air Force Secretary Michael Donley told defense reporters on Tuesday that he and other Pentagon officials met on Wednesday with Northrop Chief Executive Wes Bush and Paul Meyer, the Northrop official running the tanker bid, but had not received any communication with the company since then.

"Northrop indicated that they were appreciative of the changes that we made on the business side of the RFP and that they would take a careful look at the content," Donley said.

"We hope to have a good competition from this RFP and ... we're awaiting bidders," he said.

EADS had planned to begin producing not just the A330-based tankers, but a freighter version of the plane in the United States, after winning the tanker contract.

The European company wants to reduce its reliance on cyclical commercial jetliner revenues at its main subsidiary, Airbus, which generated 63 percent of both revenue and operating profit under the group's previous structure in 2008.

EADS is in the midst of finalizing a 3.5 billion euro bailout from seven governments to help it repair massive cost overruns on the delayed Airbus A400M airlifter.

But it still faces billions of euros of losses due to a fixed-price contract on the plane, which is being built to reduce European reliance on Lockheed Martin (LMT.N) and Boeing transport planes, and turn EADS into a more rounded civil and defense contractor.

EADS is also anxious to maintain momentum in the market for tankers outside the United States. EADS won the last five competitions against Boeing but faces a potentially tougher marketing pitch if the U.S. tender sets a different standard. (Reporting by Andrea Shalal-Esa and Tim Hepher in Paris; Editing by Steve Orlofsky)