S. Korea to sign deal this month to buy 40 F-35 jets for $7 bln -sources

(Adds byline, reaction from Lockheed, Pentagon F-35 office)

By Joyce Lee

SEOUL, Sept 24 (Reuters) - South Korea will sign a deal this month to buy 40 Lockheed Martin Corp F-35 fighter jets for about 7.34 trillion won ($7.06 billion) for delivery in 2018-2021, two people with knowledge of the transaction told Reuters on Wednesday.

South Korea confirmed its March decision, when it became the 10th country to choose F-35 fighter jets to replace aging warplanes and strengthen its defence against restive neighbour North Korea.

"We have agreed to acquire 40 jets within the total budget and reflect all the terms negotiated during the 2013 competition," South Korea's Defense Acquisition Program Administration said in a statement on Wednesday, after months of tests and negotiations.

The additional orders will lower the estimated unit cost of each of the 3,000-plus F-35 fighter aircraft to be bought by the United States and other governments in coming years.

Lockheed, engine maker Pratt & Whitney, a unit of United Technologies Corp, and other suppliers are investing heavily to drive down the program's projected $400 billion cost.

U.S. Air Force Lieutenant General Chris Bogdan, the Pentagon's F-35 program manager, reassured Seoul that a June engine failure would not affect the quality, price, delivery date and safety of its jets, which South Korea is viewing as a sort of guarantee, one person said.

Bogdan, in Norway for a meeting with the eight partner countries involved in the program, welcomed Seoul's decision.

"This is a good day for the F-35 program and we look forward to working with the Republic of Korea government in executing its F-35 program," he said in a statement.

Lockheed said initial deliveries of the South Korea jets would begin in 2018, when the first South Korean pilots will also arrive for training at Luke Air Force Base in Arizona.

The company said the agreement includes a substantial "offset" package, including a military communications satellite that will be launched into orbit and then operated by South Korea, as well as significant technical support for South Korea's K-X program to develop its own domestic fighter jet.

One of the sources said South Korea would sign a follow-up contract with the United States to allow basic maintenance of the jets within South Korea. The sources were not authorized to speak the media.

South Korea initially planned to spend 8.3 trillion won to buy 60 jets, but reduced the order to 40 jets last year after dropping an option to buy Boeing Co (NYSE: BA - news) 's F-15s in favour of jets with stealth capabilities.

The South Korean agency did not have an official comment on the timing of the deal but has previously indicated the third quarter. Lockheed Martin did not have an immediate comment. (1 US dollar = 1,039.8000 Korean won) (Additional reporting by Andrea Shalal in Washington; Editing by Christopher Cushing and Ken Wills)