CORRECTED - UPDATE 1-US kills GE/Rolls Royce engine for F-35 fighter

(Corrects spelling of Immelt in paragraphs six and seven) (Adds GE-Rolls Royce reaction, background)

WASHINGTON, April 25 (Reuters) - The U.S. Defense Department has ended a contract with General Electric Co (GE.N) and Rolls-Royce Group Plc (RR.L) to develop an alternate engine for the F-35 fighter jet, the department said on Monday.

The Pentagon has sought for five years to kill the second engine as an economy measure over what had been, until February, congressional efforts to keep it alive for competitive reasons. United Technologies Corp (UTX.N) unit Pratt & Whitney is building the engine powering Lockheed Martin Corp F-35 early-production models.

At stake is potential engine business that the Government Accountability Office, Congress's audit arm, puts at $62 billion in 2002 dollars. The watchdog Project on Government Oversight reckons this equals about $75 billion in 2010 dollars. The GE-Rolls Royce teams says the business would be worth $100 billion over time.

The termination order had been expected. GE and Rolls Royce said in a statement they would work with congressional backers of a competitive engine to get its funding restored in fiscal 2012, which starts Oct. 1.

In March, the Pentagon issued an order to halt work on the GE-Rolls Royce project, pending final resolution of the second engine's fate in congressional action on the fiscal 2011 budget.

GE chairman Jeff Immelt, in a letter to employees on the matter released earlier on Monday, said: "I can assure you we are not giving up.

"Especially in a time of unprecedented deficits, we do not believe the government should forfeit the extraordinary savings (forecast at $20 billion by the U.S. Government Accountability Office) - not to mention the meaningful acquisition reform - that competing engines ensures," Immelt wrote.

The Pentagon calculates it would cost $2.9 billion more to develop the alternate engine so it could compete against Pratt & Whitney's, but says it does not see a payback for the investment. (Reporting by Jim Wolf; additional reporting by Karey Wutkowski; editing by Andre Grenon)