UPDATE 2-Dish to drop Weather Channel in fee dispute

* Dish to drop Weather Channel at midnight Thursday

* Dish to launch new station, Weather Cast

* Exec says Weather Channel did not offer local forecasts

* Move to cost Weather Channel a sixth of U.S. viewers

(Adds byline, executive interviews, background)

By Yinka Adegoke

NEW YORK, May 20 (Reuters) - The Weather Channel said on Thursday U.S. satellite TV operator Dish Network Corp (DISH.O) plans to drop the cable network at midnight after the companies failed to reach agreement on carriage fees and programming.

The move would cost the channel about one-sixth of its U.S. viewers since Dish, which has 14.3 million subscribers, had declined to pay "standard industry rates" to carry the network that is available in more than 100 million U.S. homes.

Weather Channel had been seeking a monthly increase of around 1 cent a customer, said a person close to the negotiations. According to SNL Kagan data, Weather Channel is paid an average per subscriber of 11 cents a month.

The two sides previously negotiated an extension on the existing carriage contract, but that will expire at midnight.

Most carriage disputes between networks and distributors center around money, but Dish programming chief Dave Shull said the dispute was as much about strategy as about money.

"Weather Channel is asking for significant increases, but the problem I have is not the increases, it's that this is not a product my customers want," he said in an interview.

Shull said the Weather Channel had been unable to satisfactorily provide localized weather information for satellite TV service, which he said was a source of frustration for Dish customers.

"Weather Channel was structured for cable and its service was not localized enough for our subscribers," said Shull in an interview.

Dish and its larger satellite TV rival, DirecTV Group (DTV.O) are the only two truly national pay-TV distributors as cable operators are limited to their local cable systems.

But Weather Channel said it has been able to provide local service on satellite TV, pointing to an interactive weather application launched in 2007 for Dish subscribers it said gives access to local weather information.

"The interactive application also allows viewers to access weather all across the country and save up to five favorite markets for access to areas of personal interest," said Shirley Powell, Weather Channel executive vice president of communications.

Another point of dispute for Dish was that Weather Channel's various online services, as well as other competitors, were widely available for free on the Web, devaluing the information it provides on TV.

Weather Channel prides itself for being at the vanguard of online and interactive services among cable networks and recently launched applications for the iPad tablet.

Dish, the No. 3 U.S. pay-TV operator, plans to introduce a new station called The Weather Cast, a 24-hour weather service it described as "all weather, all the time" to replace the Weather Channel.

Shull said the new station would offer more granularity in local weather forecasts.

Dish, which is run by founder Charlie Ergen, said the Weather Channel had "moved away from weather reporting to a mix of movies and other entertainment-focused programming."

Shull said it was still possible the two sides could work out a deal, but with the launch of Weather Cast, it would be increasingly difficult.

"We continue to have dialogues with them, but it's going to be difficult because they would have to make some substantial commitments to local weather for this to work out."

The Weather Channel is jointly owned by NBC Universal and private equity firms Blackstone Group LP (BX.N) and Bain Capital. (Reporting by Yinka Adegoke; editing by Richard Chang and Andre Grenon)