UPDATE 2-Second F-35 engine out of US Senate budget plan

Fri Mar 4, 2011 5:48pm EST

* U.S. house 2011 budget has already cut GE-Rolls engine

* Senate bill could come up for vote next week

* GE says budget process not over (Adds reaction from GE)

WASHINGTON, March 4 (Reuters) - A Senate Democratic budget plan released on Friday would eliminate funding for an alternate engine for the F-35 Joint Strike Fighter in a blow to its manufacturers, General Electric Co (GE.N) and Rolls-Royce Plc (RR.L).

Money for the project has already been stripped out of a budget proposal that passed the U.S. House of Representatives last month.

The Pentagon has tried to kill the program since 2007, but Republican and Democratic lawmakers have repeatedly added it back into the budget, citing concerns about associated jobs and relying on a single engine design to power thousands of the fighters.

The latest move may signal that the tide has shifted for the big weapons program, although its supporters in Congress could still resurrect the program by introducing amendments during a floor vote, or in the House-Senate conference to produce a final bill.

For now, fiscal pressures appear to have given the Pentagon the upper hand as a record $1.65 trillion budget deficit is projected for the current fiscal year, equal to 10.9 percent of the economy.

Republicans have passed a $61 billion spending-cut package in the House, and Democrats are responding with a proposal that would trim $6 billion from current levels.

The Democratic bill could come up for a vote in the Senate early next week.

Lawmakers have given themselves two weeks to resolve their differences and sign off on a bill that would set funding levels through the remainder of the fiscal year that ends Sept. 30.

United Technologies Corp's (UTX.N) Pratt & Whitney unit builds the engine being used in early production of Lockheed Martin's (LMT.N) F-35.

The alternate engine program carries a price tag of $450 million this year.

The Pentagon argues that terminating the program would save about $3 billion over the next few years, but GE and Rolls Royce officials say the cost to complete development of the engine would be closer to $1.8 billion.

GE spokesman Rick Kennedy said the Senate measure was part of the process, but the issue was not completely resolved.

"It's not over," Kennedy told Reuters. "This is part of the budget process, but that process and the overall fate of the F136 (engine) is just not over," he said.

One former defense official disagreed, noting that the House vote last month had revealed eroding support for the program. "I think the tide has turned," said the official, who was not authorized to speak on the record. (Reporting by Andy Sullivan and Andrea Shalal-Esa; Editing by Gerald E. McCormick and Tim Dobbyn)

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