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UPDATE 1-US Navy kills a General Dynamics shore-hugging ship

(Adds details, company comment)

WASHINGTON, Nov 1 (Reuters) - The U.S. Navy on Thursday canceled another ship in a new class of shore-hugging vessels, saying it could not agree on a modified contract with General Dynamics Corp GD.N after big cost overruns on its initial ship.

The Navy scrubbed the littoral combat ship, or LCS, for its convenience, meaning General Dynamics will receive no termination fee, officials said at a Pentagon briefing.

General Dynamics and Lockheed Martin Corp LMT.N each had been originally contracted to build two of the new class's first four ships, designed to deal with threats found near coastlines, including floating mines, diesel submarines and terrorists in speedboats. The cancellation of the ship known as LCS 4 marked the latest setback for a program that has been rocked by cost growth. On April 12, the Navy announced it could not reach agreement on a restructured contract for Lockheed's ships. Consequently, it killed Lockheed's second LCS as well.

The Navy had sought $910 million in procurement funding for three LCS vessels in its budget for fiscal 2008 before opting to cancel Lockheed’s and now General Dynamics’ second ships.

Overall, the program to build small, fast LCS vessels remains critical to achieving the Navy’s 313-ship fleet target, said Rear Adm. Charles Goddard, the service’s point man for ships. Navy plans call for buying a total of 55 LCS vessels.

“The Navy worked closely with General Dynamics to try to restructure the agreement for LCS 4 to more equitably balance cost and risk, but could not come to terms and conditions that were acceptable to both parties,” a Defense Department statement said.

(Reporting by Jim Wolf)

((Editing by Lisa Von Ahn; julie.vorman@reuters.com, +1 202 898 8467)) Keywords: GENERALDYNAMICS SHIP/

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