* Boeing says will increase 737 production rate to 42/mth
* New rate will begin in first half of 2014
* Boeing shares down over 1 pct (Adds Albaugh comments from London; updates shares)
By Kyle Peterson
CHICAGO, June 15 (Reuters) - Boeing Co (BA.N) plans to increase the production rate on its hot-selling 737 narrowbody plane to 42 per month, starting in 2014, the company said on Wednesday.
The world's second-largest plane-maker after EADS EAD.PA unit Airbus produces 31.5 737 airplanes per month and expects to increase to 35 per month in early 2012, 38 per month in the second quarter of 2013, and then 42 per month in the first half of 2014.
Boeing has 2,101 unfilled orders for 737 models, according to its website. The company has taken a net total of 65 orders for the plane this year.
Boeing is deciding whether to redesign its 737 or put a more fuel-efficient engine in the current design. A redesign would take longer but would save more fuel for budget-conscious airlines.
Airbus has said it would put a new engine in its competing A320 narrow-body. Airbus expects its sales to be boosted by the planned revamp.
In May, the European plane-maker said it would increase production of its best-selling A320 family of aircraft to a record 42 planes a month, underlining signs of a global economic recovery.
Commercial aircraft demand is picking up as air travel recovers and funds return to the leasing market. Soaring oil prices, meanwhile, are forcing airlines to renew fleets with more fuel-efficient planes.
Speaking at London's Royal Aeronautical Society on Wednesday, Boeing Commercial Airplanes (BCA) Chief Executive Officer Jim Albaugh said that over the next 20 years, there will be demand for more than 33,000 new commercial planes, valued near $4 trillion.
He said BCA is raising production rates by 40 percent in the next three years.
"It's good to see that after the worst economic downturn since the great depression, the commercial airplane industry is roaring back," Albaugh said.
He said Boeing has made no decision yet on whether to redesign or re-engine the 737, but the company has said it was leaning toward a redesign. Albaugh said Boeing would make no announcement of its decision at next week's Paris Air Show.
The Airbus A320 competes with Boeing's 737 for sales estimated at $1.7 trillion over the next 20 years.
The two rival 100-200 seat aircraft are the backbone of most airlines' medium-haul fleets and are credited with powering the dramatic growth of low-cost carriers.
"We see this as a positive development for Boeing and the aerospace supply chain. A potential 737 rate increase has been widely discussed, but we had expected an announcement on 737 rates to occur later this year," said RBC Capital Markets analyst Robert Stallard said in a research note.
"The earlier-than-anticipated decision would imply continued robust airline demand for the plane, but also Boeing's ability to reassure suppliers that this is a realistic, achievable and sustainable rate increase," Stallard said.
Boeing's shares were down 89 cents or 1.2 percent at $73.75 in afternoon trading, as U.S. stocks fell broadly. (Reporting by Kyle Peterson and Rhys Jones in London, editing by Gerald E. McCormick, Maureen Bavdek and Derek Caney)