UPDATE 1-US jet contract decision "surprised" Brazil gov't
* Brazil "surprised" with U.S. plane contract decision
* Says move "doesn't help" bilateral defense programs
* U.S. gov't "still interested" in Embraer aircraft
* Brazil to remain in talks with U.S. over decision
By Jeb Blount and Guillermo Parra-Bernal
RIO DE JANEIRO/SÃO PAULO, March 1 (Reuters) - A decision by the United States to cancel a $355 million defense aircraft contract with Brazilian planemaker Embraer has surprised the government of Brazil which had hoped for the development of a bilateral defense program, Brazil's Foreign Affairs Ministry said on Thursday.
The ministry said in a statement that the government was "surprised" with the cancellation "especially with the way that it happened and the timing." The U.S. Air Force earlier this week called off the purchase of 20 Embraer's Super Tucano jets due to problems with documentation.
The light, ground-attack aircraft was sought to provide close air support for the Afghan Army in the field and as a turbo-prop training plane for Afghan Air Force pilots. With future orders, the contract is believed to be worth as much as $1 billion.
"The government believes that this situation doesn't help to the progress of bilateral relations on the defense area," the statement said.
The cancellation comes as the U.S. seeks to sell fighter aircraft to Brazil. Boeing Co's F-18 "Super Hornet" fighter is in competition with Dassault's Rafale and Saab's "Gripen NG" for an order of at least 36 jets for Brazil's Air Force.
Reuters reported on Feb. 12, citing unnamed government sources, that Brazil is "very likely" to choose Dassault in the bid. The cancellation of the Embraer deal caused some senior figures within President Dilma Rousseff's administration to wonder if it was retaliation for Boeing reportedly falling out of favor, officials told Reuters this week.
Early on Thursday, U.S. Deputy Secretary of State William J. Burns said in Rio de Janeiro that his country is still interested in acquiring the Embraer planes. The contract, which was awarded to Embraer and Sierra Nevada Corp, also included the supply of electronics and other services.
The U.S. Air Force blamed "faulty paperwork" for the cancellation of the contract, which is also being challenged in U.S. Federal court by the losing bidder, Hawker Beechcraft .
"Embraer is obviously a great company and the Super Tucano is a very fine aircraft," Burns said. "The United States is now in the midst of some internal processes but we remain interested."
Neither the Air Force nor Burns would elaborate on the documentation problems.
Burns sought to put concerns over mutual retaliation to rest, saying that "these are separate contracts." The Brazilian government will remain in talks with the United States over the matter, the statement said.
"We're convinced that the F-18 is the best of the available aircraft and a reflection of that is that it is the aircraft that the United States is going to be using for the next 20 to 30 years," Burns said.
As part of the agreement Boeing will provide the technology for Brazil to build much of the aircraft on its own, a key factor for Brazilian politicians looking to boost their aircraft industry and defense capabilities.
"We're convinced that the technology transfer package that we're offering along with that aircraft (F-18) is unprecedented in our relationship (with Brazil)" he said. "It is exactly the same kind of package that we offer to our closest NATO partners."
NATO members include Britain, Canada, France and Germany.
The U.S. Air Force chief of staff, General Norton Schwartz, acknowledged earlier this week that the cancellation of the Super Tucano contract was an embarrassment for the Air Force, which has struggled with acquisition problems over the last decade. Schwartz said "there would be hell to pay" if the documentation problem was not an innocent mistake.
The United States, which has soldiers in Afghanistan along with other Nato nations, is handling the procurement agreement for the Afghan Air Force.
The cancellation of the Super Tucano contract is one of several Embraer has faced involving the United States over the last 20 years. In the 1990s, the Super Tucano and Embraer in partnership with U.S.-based Northrop Grumman lost out as the joint fighter training aircraft for Nato after heavy lobbying from U.S. competitors.
While the Super Tucano is driven by a propeller, that prop is driven by a gasoline turbine rather than pistons driven by an internal combustion engine. As a result, its performance is similar to that of a jet aircraft and is considered a good trainer for jet pilots.
Embraer sells about two-thirds of its aircraft, including regional passenger jets and executive aircraft, in the United States and gets about two-thirds of its engines and other parts from U.S. suppliers, Burns said.
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