UPDATE 1-US Navy to add 3 LCS ships in fiscal 2010

(Adds details, background)

By Andrea Shalal-Esa

WASHINGTON, Oct 16 (Reuters) - The U.S. Navy on Thursday said it would amend an ongoing competition between Lockheed Martin Corp (LMT.N) and General Dynamics Corp (GD.N) to add three shore-hugging littoral combat ships in fiscal year 2010.

The Navy said it would delete from the competition a ship it had hoped to buy with fiscal 2008 funds, in line with direction given by Congress in the fiscal 2009 defense spending bill. But Navy spokesman Lt. Cmdr. Victor Chen said the service still planned to award a contract to each of the companies for a second LCS ship in 2009.

"The Navy intends to award one ship to each industry team in FY09 and hold a concurrent competition for three additional ships in FY10," Chen said in a statement.

"Affordability remains a key tenet of the LCS program as the Navy works with industry to provide the greatest capability for the lowest cost," he said.

It was not immediately clear when the Navy would make the contract awards for the two littoral combat ships (LCS) in fiscal 2009, that began Oct. 1.

Congress last month passed an appropriations bill that deleted 2008 funding for one LCS ship, and said the Navy could use that money to pay for anticipated cost overruns on the two ships in the budget for 2009.

Lawmakers also agreed to postpone implementation of a $460 million cost cap on each LCS ship until 2010, after Navy officials explained that neither company would be able to meet the cost cap without removing significant equipment from the ships.

Lockheed delivered its first LCS in September, and General Dynamics is expected to deliver its first LCS ship in 2009. The Navy canceled contracts for a second ship from each company after massive cost overruns on the first ships.

It then launched a new competition, under fixed price terms, and had initially hoped to award contracts for three ships -- one in fiscal 2008 and two in fiscal 2009 -- in August, but those plans were derailed by the contractors' issues in meeting the cost cap.

Both companies say they urgently need the orders to maintain their workforces. Lockheed's shipbuilder, Manitowoc Co Inc's (MTW.N) Marinette Marine in Wisconsin, has already laid off workers this month, and says more layoffs will occur next month. (Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn)