* Ryanair agrees to buy 175 Boeing current generation 737s
* Irish airline to grow capacity 25 pct in next five years
* A win for Boeing after defection of Lion Air to Airbus
By Conor Humphries and Adam Kerlin
DUBLIN/NEW YORK, March 19 (Reuters) - Budget Irish airline Ryanair handed Boeing its largest European order ever on Tuesday, a deal for 175 jets worth $16 billion at list prices that boosts the U.S. planemaker's fortunes and strengthens the Irish carrier's domination of Europe's low-cost market.
The provisional deal marks a significant commitment from Europe's largest discount carrier in the face of fresh concerns about the economy, highlighted by a looming bailout in Cyprus.
The order for current-generation Boeing 737-800s will increase Ryanair's fleet to 400 planes from 300 at present, as 75 old planes are retired in coming years, allowing the carrier to increase passenger numbers by 25 percent over the next five years as rivals plan capacity cuts.
The deal, which must be confirmed and then approved by Ryanair shareholders, maintains the Irish airline as one of the few remaining all-Boeing carriers. It also is a welcome lift to Boeing after Indonesia's Lion Air on Monday picked European rival Airbus in a $24 billion firm mega-order. Lion Air had been an exclusively Boeing customer for jets.
The industry benchmark 737-800, a 189-seat jet whose main competitor is the Airbus A320, is worth $89.1 million at list prices, but large orders attract steep discounts and industry appraisers value the plane closer to $40 million.
"This deal embeds our cost advantage and pricing advantage over our European competitors," Ryanair Chief Executive Michael O'Leary told Reuters in a telephone interview.
"Hopefully it will help refocus people's minds on the fact that Boeing continues to deliver great aircraft and is growing strongly, rather than a minor issue on the 787," he said.
O'Leary, who has a reputation for securing bargain aircraft orders during industry slumps, declined to say how much of a discount he obtained for the order. But he said Boeing's struggles with the 787 had created an opportunity for both sides.
And, having placed a big order for current-generation 737s, O'Leary said Ryanair could place another order for Boeing's forthcoming 737 MAX, an even more fuel-efficient model.
The current 737 deal gives the Irish airline "breathing room" to talk to Boeing about orders for the 737 MAX, O'Leary told a New York news conference. He added that Ryanair likes the 737 MAX and would place an order if terms were right.
Reuters reported exclusively in late January that Ryanair was closing on a deal for at least 150 current-generation 737 jets to be completed within weeks. Ryanair denied the story at the time.
Boeing Commercial Airplanes Chief Executive Ray Conner said Boeing has not had any difficulty closing major aircraft orders despite the ongoing battery problems with its 787 passenger jet.
"We compartmentalize that. We have a lot of people working on the 787 situation ... We're working on producing 787s as we get the battery situation solved," Conner said at the news conference on Tuesday.
Conner said the Ryanair deal fills up Boeing's 737 production "pretty significantly" until 737 MAX assembly starts in the next few years, with first delivery slated for 2017. Boeing is now producing 38 737s a month.
Ryanair shares were up almost 4 percent at 1415 GMT at 6.03 euros. Boeing shares were up nearly 0.3 percent at $85.44.
"This order puts Ryanair back on track for growth at a time when many European airlines are shrinking," said Donal O'Neill, an analyst with Goodbody Stockbrokers in Dublin.
"For Boeing it keeps a major customer on board and helps position it to hook Ryanair for an order of the (next-generation) 737 MAX in a few year's time."
O'Leary said Ryanair has set up a senior team to examine the operating efficiencies of the 737 MAX and the benefits of Ryanair being "a lead customer" with a large order for the jet.
"The minimum order would be 100 and we have asked that team to try to conclude its review before the end of calendar 2013," O'Leary said.
The current deal will allow Ryanair to extend its lead in the Europe's low-cost travel market, which has grown sharply since the start of the euro zone crisis as flag carriers struggle and business passengers downgrade.
Ryanair has aggressively shifted its capacity to fill gaps left by reductions in short-haul flights by flag carriers such as Iberia, and by the collapse of others such as Malev.
"We have more growth opportunities in Europe than we can handle," O'Leary said.
The airline, which had just six jets when O'Leary was hired as deputy chief executive in 1991, now flies more international scheduled passengers than any other airline, according to the International Air Transport Association.
The Ryanair deal is a timely boost to Boeing, which last week won U.S. approval for test flights for its new 787 Dreamliner, which has been grounded for two months after batteries burned on two of the jets in January.
The U.S. Federal Aviation Administration last week approved Boeing's plan for testing a revamped battery system for the plane, including tests Boeing had helped develop but not previously used.
Boeing predicted the plane would be back in service in weeks, not months. But its biggest 787 customer, All Nippon Airways, said that prediction was too uncertain for it to base planning on.
Boeing and Airbus are upgrading their medium-haul passenger models to offer about 15 percent fuel savings from the middle of the decade, raising the prospect of bargains on the outgoing models to help manufacturers ensure steady production.
O'Leary said the fact that the 737 provided nine more seats than the A320, which is due to be revamped with fuel efficient engines in 2016, was more important to Ryanair than any possible fuel savings.
To pay for the new jets, O'Leary said Ryanair would use internally generated cash flow and debt, avoiding the need to tap shareholders for capital. He said the airline aims to have the average age of planes in its fleet at less than five years once all of the new planes are delivered.
He said most of the 737s would be delivered in 2017 and 2018, with about 50 arriving each year.