UPDATE 2-US arms buyer shoots down dual-source tanker idea

(Adds analysis, quotes, background)

By Jim Wolf

WASHINGTON, Feb 5 (Reuters) - The Pentagon's top arms buyer rejected on Thursday fresh calls to divide a stalled multibillion-dollar aerial-refueling aircraft order between rival designs from Boeing and Europe's Airbus.

"If you split this buy now, you have to pay two sets of development costs," said John Young, undersecretary of defense for acquisition. "That totally wipes out the competitive aspects of this."

Boeing Co (BA.N) and Northrop Grumman (NOC.N), which has partnered with Airbus parent EADS (EAD.PA), have waged a politically charged fight to sell the U.S. Air Force an initial 179 tanker aircraft valued at $35 billion. Two additional planned subsequent procurement phases could boost the purchase to more than $100 billion.

Defense Secretary Robert Gates halted the competition in September saying it had grown too heated, needed a "cooling off" period and should be left to the next U.S. administration to decide.

He acted after the Government Accountability Office upheld a Boeing protest of a contract award that had gone to Northrop last February. Boeing said it had been treated unfairly. The GAO agreed and the Pentagon had prepared to hold a fresh bidding round last year.

Gates, the sole holdover from President George W. Bush's cabinet, told Congress last month the Pentagon could restart the contest this spring, with a winner chosen in early 2010. He, too, has said splitting the buy from the start would be the worst outcome for taxpayers.

"I would agree totally and go beyond that," Young told a small group of reporters at the Pentagon. A dual-source approach, he said, risked costing "significantly more up front and in the long term."

But Rep. John Murtha, chairman of the U.S. House of Representatives' Appropriations defense subcommittee, has called for splitting the order to break the logjam between the camps and their rival congressional backers.

"I'm trying to work this problem out," he said on a Jan. 29 visit to Mobile, Alabama, where Northrop and EADS planned to assemble their tanker based on the Airbus A330-200 commercial airliner. "Because I don't think it's going to work the way the Defense Department is trying to work it out."

Murtha would have more to say about this after a planned trip to Washington state next weekend for talks with Boeing officials, said his spokesman, Matthew Mazonkey.

Rep. Jo Bonner, a Republican who represents the Alabama district where the assembly would take place, also has made clear he now favors a split buy.

Retired Lt. Gen. Micahel Dunn, president of the Air Force Association, said he thought Murtha was "on to something" -- buying more tankers more quickly with continuous competition for the lion's share of orders.

"I think over the very long run you're going to save money for the taxpayer" with such a dual-source approach, he said, plus reduce the chance of further protests.

Otherwise, he said in a telephone interview, "I'm afraid that you'll already start an appeal by the way you write the request for proposal."

(Reporting by Jim Wolf; editing by Tim Dobbyn, Bernard Orr)