* White House warned measure could harm ties with allies
* Lockheed-led consortium disappointed by move
* Recent test said to demonstrate system's capabilities
By Andrea Shalal-Esa
WASHINGTON, Dec 18 (Reuters) - House of Representatives and Senate negotiators on Tuesday defied the White House and passed a defense budget bill that bans funding for the final year of a joint ground-based missile defense program with Italy and Germany.
The lawmakers prohibited a final U.S. payment of $400.9 million for development of the Medium Extended Air and Missile Defense System (MEADS), saying Washington has no plans to produce the system being built by Lockheed Martin Corp and its partners in Italy and Germany.
Industry executives and foreign officials say the government may face termination fees nearly equal to the money required to finish the system, which is financed by the United States, Italy and Germany.
It has been in development for more than a decade at a combined cost of more than $4 billion.
MEADS International, the Lockheed-led consortium developing the missile defense system, said the program had achieved several milestones in recent weeks.
It said a recent test demonstrated its 360-degree capability to detect, track and destroy an "air-breathing" target, a term used to describe airplanes and cruise missiles, versus ballistic missiles.
The White House last month reiterated its concerns about the bill, warning that a ban on MEADS funding could harm Washington's broader relationship with its allies, jeopardizing the kind of multinational projects favored by the Obama administration as budget pressures mount.
Failure to fund the final part of MEADS development could also make it impossible to take advantage of technologies developed by the program, the White House warned.
Other provisions of the 2013 defense authorization bill have prompted a veto threat by the White House.
Defense Secretary Leon Panetta and officials from Italy and Germany raised concerns this year about the ban on funding for MEADS, which was intended to replace the U.S. Army's aging Patriot air and missile defense system.
The Pentagon announced last year that it would stop funding the program after fiscal 2013, calling it unaffordable in the current budget climate.
That prompted some lawmakers like Republican Senator John McCain of Arizona to call for an immediate halt in spending on the program.
Italy's defense minister told McCain in a letter dated Dec. 7 that MEADS was ideally suited to help address "the current and future air, tactical and ballistic missile threats that Italy, Europe and NATO will have to face for many years to come."
Failure by the United States to fulfill its funding commitment for 2013 would be "a unilateral withdrawal of our transatlantic agreement and (memorandum of understanding) and the U.S. would be held financially liable," he wrote.
Michael Amato, a spokesman for the Democrats who serve on the House Armed Services Committee, said U.S. participation in the program was based on "availability of appropriated funds."
He said lawmakers agreed to fund the program in fiscal 2012 on the condition that the Pentagon wrap up funding for the program, and propose a lower-cost solution.
"This year, the House and Senate were clear that they would prohibit the funds for this program as there are no plans for production," he said.
The White House had no additional comment, referring to its previous statement of administration policy.