UPDATE 3-US air tanker terms expected Wednesday

* Nine governors back Boeing bid

* Separate coalition urges buying both airplanes

* Terms expected on Wednesday (Adds details on governors’ event)

WASHINGTON, Feb 22 (Reuters) - The U.S. Air Force is due to issue final terms for a $35 billion aerial tanker competition this week, probably Wednesday, in a third attempt in nine years to replace its current 50-year-old planes.

U.S. Defense Secretary Robert Gates said on Monday he expected the Air Force to release a final request for proposals soon, and reiterated his hope that both Boeing Co BA.N and Northrop Grumman Corp NOC.N would bid for the work.

“We are very hopeful that we will have two competitors and we think that it is a very fair RFP (request for proposals),” Gates said. “I expect it to be released pretty soon.”

The Air Force said last week it expected to issue final terms before the end of the month and was bracing for the possibility that only Boeing may submit a bid.

Northrop and Airbus parent EADS EAD.PA won the Air Force contract in the last competition, but the Pentagon canceled the deal after government auditors upheld a Boeing protest.

Northrop has said the team will not bid this time around unless the Air Force makes significant changes to a draft request for proposals released in September.

Congressional sources said they expected Pentagon officials to brief lawmakers about the final terms on Wednesday, after releasing details to the companies.

Last September, when the Air Force released draft rules for the competition, Deputy Defense Secretary William Lynn and the Pentagon’s chief weapons buyer, Ashton Carter, met with key lawmakers to explain the process. Then they held a joint news conference, together with Air Force Secretary Michael Donley.

Defense officials say they expect the Pentagon to handle the release of the final terms in a similar fashion.

Meanwhile, nine governors joined in a coalition to support Boeing’s bid, which is based on its 767 commercial airliner.

“Awarding the refueling tanker contract to Boeing will provide work for 40,000 to 50,000 people all across the country at a time when the national economy is still struggling mightily,” Washington Governor Chris Gregoire said in a statement ahead of a Washington, D.C. news conference.

The coalition also includes the governors of Kansas, Iowa, Connecticut, Illinois, Maine, Missouri, Oregon and Utah, other elected officials, labor unions and business organizations.

“With a lagging economy, we can’t afford to send thousands of jobs and billions of dollars overseas,” said Governor Jay Nixon of Missouri, where Boeing has a large facility.

Northrop’s bid would create over 48,000 jobs across the country, including Alabama, where it had planned to assemble its tankers. Lawmakers from Alabama and neighboring states have been strong advocates of the Northrop bid, arguing that the Air Force’s draft rules give an unfair advantage to Boeing.

A separate nonprofit group called American Jobs Now issued a statement urging the Pentagon and Congress to fund orders for both the Boeing and Northrop planes, saying such a plan would create twice as many jobs at a time of economic crisis.

The group, which says it has not received any funding from Northrop, Boeing or EADS, argues that buying both planes would help replace the current KC-135 tankers more quickly, while hedging against “the risk of cost-inflation that is always present when you are dealing with a single supplier.”

Aerospace analyst Richard Aboulafia with the Virginia-based Teal Group, said the Pentagon had clearly shifted its approach from the “best value” competition it staged in 2008 to what Northrop officials have called a “price shootout.”

He said the chances of Congress directing the Pentagon to buy both planes had dimmed with the death of Representative John Murtha, the Pennsylvania Democrat who headed the defense subcommittee of the House Appropriations Committee.

Industry officials said they would need to review the final terms closely before issuing any substantive statements.

“The devil really is going to be in the details,” said one industry official who was not authorized to speak publicly. “I don’t think it’s predetermined.”

The official said it was apparent that Northrop was ready to walk away from the competition if it did not see changes that would allow the company to submit a competitive bid. (Reporting by Tabassum Zakaria and Andrea Shalal-Esa; Editing by Leslie Gevirtz, Gerald E. McCormick, Bernard Orr and Steve Orlofsky)