UPDATE 3-US Rep. Murtha believes F22 deal can be reached

* Murtha does not believe F-22 veto will materialize

* Subcommittee permits sole or split work on tanker

* Panel proposes money for new presidential helicopter

* Decision on military spending bill still months off (Recasts, White House sticks with veto threat)

By John Crawley

WASHINGTON, July 16 (Reuters) - Congress and the Obama administration can still strike a deal on funding new F-22s made by Lockheed Martin Corp (LMT.N) despite a presidential threat to veto military spending legislation if the fighter jet program is not terminated, a senior lawmaker said on Thursday.

"It won't come to that (a veto). We will work it out," U.S. Representative John Murtha, the chairman of the House Appropriations Subcommittee on Defense, said at a briefing on the $636 billion blueprint for military priorities in 2010.

Murtha said he would reach out to the White House on the F-22, the premier U.S. fighter aircraft, and funding for other big-ticket programs supported by members of his committee that the administration would like to scale back or eliminate.

This includes money for a new VH-71 presidential helicopter led by Lockheed that the administration opposes. The subcommittee earlier in the day set aside $485 million for five aircraft.

"They know they need a new helicopter," Murtha said of the administration.

Final decisions on military spending matters are still months away.

The panel also approved $369 million in advance funding to build 12 more F-22s over time. A separate proposal in Senate legislation would authorize seven new planes at $1.75 billion.

Shares of major defense contractors, including Lockheed, Boeing Co (BA.N), Northrop Grumman Corp (NOC.N) and General Dynamics Corp (GD.N) were up modestly on Thursday.

The F-22 tactical fighter is a pivot point in attempts by President Barack Obama to reshape military acquisition practices, which he views as a top Pentagon priority after years of cost overruns and schedule delays in various programs.

There has been a sharp increase in weapons spending over much of the past decade.

Obama said on Monday that he and his top military advisers believe F-22s beyond the 187 planes already budgeted are unnecessary. Obama threatened a veto of the annual Pentagon spending measure unless lawmakers dropped their attempts to extend the program.

The White House declined to comment on Murtha's remarks, saying that Obama has been clear on where he stands.

Senators Carl Levin and John McCain, influential on military affairs in the Senate, agree with Obama and are trying to derail the F-22 provision in their bill.

However, military hardware contracts are popular with many lawmakers because of the jobs they create, and so far Levin and McCain do not have enough support in the Senate to strip out the extra jets, key lawmakers have said.

Separately, Murtha's House subcommittee approved $440 million for developing new Air Force aerial refueling tankers and left the question open on whether the Pentagon should award the contract to one company or split the work.

Language in the appropriations bill would permit the Defense Department to take either approach but encourages production of more than one plane per month.

Boeing vied with Northrop and its European partner, EADS (EAD.PA), last year for the contract for 179 planes worth up to $35 billion.

An award to Northrop was overturned on appeal by government auditors. Military officials may not release details of the next competition until September.

The U.S. fleet of 415 KC-135 refueling aircraft is nearly 50 years old on average. (Reporting by John Crawley; Editing by Matthew Lewis, Gerald E. McCormick, Gary Hill)