updated 1/12/2006 6:32:46 PM ET 2006-01-12T23:32:46

The Army canceled Lockheed Martin Corp.’s contract to build a new spy plane Thursday, saying the defense contractor’s design for the plane for the expected $8 billion program would be too costly.

However, the Army said it plans to continue the Aerial Common Sensor program despite problems Lockheed faced with outfitting a jet for surveillance while struggling to keep its weight low.

“We learned a great deal in the early stages of this contract during the system’s design maturation phase and we intend to take this knowledge forward,” said Claude Bolton, the Army’s assistant secretary for acquisition and logistics.

The decision is a blow for Bethesda-based Lockheed and its Brazilian aircraft maker partner Empresa Brasileira de Aeronautica SA, which won the initial $879 million contract in 2004 to design the jet for the Army and Navy. Lockheed beat out rival Northrop Grumman Corp. for the contract.

Lockheed spokeswoman Judith Gan said the company was disappointed by the Army decision and that it had faced “technical challenges” in its effort to build the plane. The company accepts “responsibility for execution issues that arose during the course of the contract,” she said.

But the project has been hampered with problems as Lockheed tried to meet the often divergent demands of two military branches. The Army’s decision comes after it issued a stop work order in September to review the troubled program.

Lockheed originally proposed using a Embraer 145 jet, but discovered it was too small to carry all the electronics needed for the spy plane. The defense contractor then proposed using a larger Bombardier Global Express business jet, but Army officials rejected that proposal.

Using the larger plane would have doubled the cost of the development project, delayed fielding the plane by four years and cut the number of aircraft produced by one, according to Timothy Rimer, an Army spokesman.

Loren Thompson, a defense analyst with the Lexington Institute, said the Pentagon’s 2007 fiscal year budget request was changed to delete $1.9 billion from the spy plane program, a sign it was in trouble.

“Most people see that as a pretty powerful tip-off for what will happen with ACS,” he said.

The contract, awarded to Lockheed in August 2004 over a bid from Northrop Grumman Corp., was meant to create a plane for the Army and Navy. But Thompson said both branches had different wishes for its capabilities, making it hard to keep the program in line with its original intent.

The Navy, for example, wanted to use it to intercept Chinese communications while flying off that country’s coast. The Army sought a plane that could perform specific missions such as locating a radio transmission on a battlefield.

“The government should never have tried to develop one system to meet the very different needs of the Army and Navy,” he said. “It would have produced a flying albatross.”

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