Big US arms sale to UAE likely next year-Lockheed

* Missile defense sale could total nearly $7 billion

* Lockheed expects new F-35 fighter flight-test delays (Adds F-35 quotes, background)

By Jim Wolf

WASHINGTON (Reuters) - The United States likely will strike a ground-breaking deal by the middle of next year to sell the United Arab Emirates a multibillion-dollar Lockheed Martin Corp missile defense system, Lockheed's chief executive said.

The so-called Theater High Altitude Area Defense is being sought by UAE as a bulwark against short-, medium- and intermediate-range ballistic missiles that could be fired by Iran.

It would be the first overseas sale of the system and could be worth nearly $7 billion, the Pentagon's Defense Security Cooperation Agency said in notifying the U.S. Congress of the possible sale two years ago.

The projected sale is "probably the most significant international order opportunity" among missile defense systems for now, Robert Stevens, Lockheed's chairman and chief executive, told a Morgan Stanley conference that was webcast.

He said he expected the government-to-government negotiations to wrap up in the first half of next year.

"You should look for that as the next step in the international expansion of the missile defense portfolio," Stevens said.

JOINT STRIKE FIGHTER

On another matter, he acknowledged a lag in the flight testing of the short-takeoff-and-vertical landing (STOVL) version of Lockheed's F-35 Joint Strike Fighter aircraft. He said he expected the test schedule to be reworked, after changes made early this year.

"The early corrective actions that we have taken, some components need a redesign, some reliability tests need to be rerun," he said. "They are showing some beneficial outcomes of those initiatives. My sense is that is not going to be enough."

"I'm quite sure we are going to see a rephasing" of the STOVL flight test program, Stevens added. The STOVL is one of three versions of the F-35, the Pentagon's costliest acquisition at a projected $382 billion for 2,457 planes.

WITHHELD CONTRACT

The Pentagon's Missile Defense Agency, or MDA, has withheld from Lockheed a $419 million THAAD missile-defense production contract because a part made by a subcontractor has yet to pass all qualification tests. Stevens was not asked about the holdup and did not discuss it.

The part in question, manufactured by Moog Inc , is an "optical block switch" designed to prevent accidental missile launch.

Army Lieutenant General Patrick O'Reilly, the MDA chief, said Aug. 17 that Lockheed, the Pentagon's No. 1 supplier by sales, had offered to foot the extra costs for any stop-and-restart production line interruptions pending completion of the switch's qualification, expected in February.

Lockheed, the THAAD program's prime contractor, said last month it was confident that it had a solution in place that would clear the way for a production go-ahead from the Pentagon this month. (Reporting by Jim Wolf; Editing by John Wallace, Gerald E. McCormick and Bernard Orr)