* Companies say lawmakers starting to understand consequences
* Failure to act could result in heavy layoffs, companies say
* Short-term solutions not favored
By Andrea Shalal-Esa
FARNBOROUGH, England, July 11 (Reuters) - Weapons industry executives say they are growing slightly more hopeful that U.S. lawmakers may yet avert another $500 billion in budget cuts facing the Pentagon come January, on top of $487 billion in cuts already on the books.
Marion Blakey, president of the Aerospace Industries Association, said a growing number of U.S. decision-makers appeared to understand the damaging effect that the uncertainty surrounding the reductions was having on investment and hiring.
Blakey and AIA, the largest aerospace industry trade group, have brought together companies, unions and elected officials to speak out against the possible budget reductions in recent months, but she said the group still had "more work to do."
AIA also commissioned a study that showed the cuts would result in the loss of 1 million direct and indirect jobs.
Blakey said she discussed the issue with a variety of industry executives, U.S. governors and government officials during the Farnborough International Airshow.
She said eight governors attended the air show and planned to raise concerns about the pending budget cuts at the National Governors Association meeting this weekend.
The U.S. Conference of Mayors also urged Congress and the Obama administration at its annual meeting in June to avert the mandatory, across-the-board cuts required under a process known as "sequestration."
"There is a path forward," Blakey told Reuters at the Farnborough event, where many U.S. companies are seeking to drum up international sales. She said political leaders were clearly on "red alert" about the issue.
Throughout the show, executives have emphasized what they see as the paralyzing effect that nagging uncertainty about the budget cuts is having on hiring, investment and acquisitions.
Marillyn Hewson, who will take over as president and chief operating officer of Lockheed Martin Corp in January, told Reuters she hoped that U.S. lawmakers will address the sequestration issue.
"I can see signs that ... there's a strong potential that it will be addressed," Hewson said in an interview at the air show.
Lockheed has said it may have to warn all 123,000 employees that they may be facing layoffs, under a federal law requiring 60 to 90 days' advance notice of job cuts.
Sean O'Keefe, a former Pentagon comptroller who is now chief executive of EADS North America, an arm of Europe's largest aerospace firm, EADS, said lawmakers were starting to get the message, but still had not settled on a solution.
Many were afraid of how financial markets would react, he said, noting that simply delaying the defense spending cuts without identifying alternative ways to cut U.S. deficits could have a similar effect on markets as Congress' failure to increase the federal debt ceiling last year.
"It will be seen as one more example of Congress being totally irresponsible," he said, adding that such a move would call into question "whether or not there is a commitment to fiscal discipline." O'Keefe heads another large defense industry trade group, the National Defense Industrial Association.
Blakey said industry executives did not favor a short-term solution because it would only prolong the uncertainty facing the sector.
But she said any solution needed to tackle entitlement programs like Social Security and U.S. tax policies.
It was in lawmakers' self-interest to do so, she said, arguing that incumbent lawmakers could lose elections in November if they did not fix a situation that they themselves had created and if hundreds of thousands of jobs were lost.
The cuts are required by the Budget Control Act passed by Congress last year. They were included in the law to encourage Republican and Democratic lawmakers to find alternate ways to cut spending by more than $1 trillion. But they failed to achieve a compromise and now the cuts are due to go into force on Jan. 2, 2013.
Some analysts say the cuts are far smaller proportionally than during previous military drawdowns. They predict defense spending eventually will be reduced by several hundred billion dollars more, with or without sequestration.
"This ... is sort of an equal opportunity disaster. It doesn't matter what party you are -- if you're an incumbent and you can't step in and deal with what is such an obviously flawed public policy ... I don't think that's going to bode well in November," Blakey said.