UPDATE 2-GE to fund F-35 engine despite stop-work order

* F136 engine said meeting or exceeding performance goals

* Pentagon calls program ‘waste of taxpayer money’ (Adds reaction from Pratt and its congressional backers)

WASHINGTON, March 24 (Reuters) - General Electric Co GE.N will keep funding work on a second engine for the Lockheed Martin Corp LMT.N F-35 fighter engine despite a stop-work order issued by the Pentagon, the company said on Thursday.

GE said its F136 engine was meeting or exceeding performance expectations and was nearly complete, while the primary F-35 engine built by United Technologies Corp UTX.N unit Pratt & Whitney had racked up $3.4 billion in cost overruns and was facing continued delays.

The U.S. Defense Department, which has been trying to terminate the alternate engine for five years, issued a stop-work order to GE and its British partner Rolls Royce RR.L on Thursday, calling it "a waste of taxpayer money that can be used to fund higher Departmental priorities."

Senate Democrats earlier this month released a budget plan that would eliminate funding for the F136 engine. Money for the program has already been stripped out of a measure that passed the U.S. House of Representatives last month.

The Pentagon has tried to kill the program since 2007, but Republican and Democratic lawmakers have repeatedly added it back into the budget, citing concerns about associated jobs and use of one engine design to power thousands of the fighters.

GE said on Thursday that several House and Senate leaders supported the program, and they could still resurrect the program by introducing amendments during a floor vote, or in the House-Senate conference to produce a final bill.

A Pentagon spokeswoman said the order would last 90 days while the department weighed the fate of the project, a decision that will ultimately be up to Congress.

“This does not terminate the F136 contract,” she said.

GE said it was disappointed that the order came before lawmakers completed the fiscal year 2011 budget

“We feel so strongly about this issue, as do our congressional supporters, that we will, consistent with the stop-work directive, self-fund the F136 program through this 90-day stop work period,” said company spokesman Rick Kennedy. He did not say how much the decision would cost.

GE said it had “no intention of abandoning the warfighter and taxpayers” or walking away from the $3 billion already invested in the second engine, which the Senate last year described as a “near model program.”

Pratt said it appreciated the government’s confidence in its F135 engine, and noted that $2.7 billion of the cost overrun reported for the engine program reflected changes in the Pentagon’s requirements.

“The Pratt & Whitney engine is proven and dependable and continues to fly with 700 flights and more than 1,000 flight hours in the past four years,” said spokesman Marty Hauser.

House Armed Services Committee Chairman Howard McKeon criticized the Pentagon’s move to halt work on the program, saying the program was funded under the current stopgap measure in place to fund the military through April 8.

“The secretary (of defense) should follow current law and not preempt the congressional deliberation process by yanking funding after a single amendment vote,” he said.

He said handing Pratt & Whitney a sole-source deal valued at well above $100 billion to make all the engines for thousands of the new F-35 fighter planes amounted to “the largest earmark in the history of the Department of Defense.”

He said the decision was especially troubling because of the Pratt engine’s development delays, noting it would cost 445 percent more than expected to finish the work.

McKeon said he would explore “all legislative options” to maintain competition in the $382 billion arms acquisition program, the largest ever.

Senator Joe Lieberman, who heads the Senate Homeland Security Committee, called the Pentagon’s “stop work” order an essential step toward focusing scarce Pentagon dollars. (Reporting by Andrea Shalal-Esa and David Alexander; Editing by Lisa Von Ahn, Phil Berlowitz)