South Korea to sign deal this month to buy 40 F-35 jets for $7 billion: sources

SEOUL (Reuters) - South Korea will sign a deal this month to buy 40 Lockheed Martin Corp (LMT.N) 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 in March became the 10th country to choose F-35 fighter jets, with which it will replace aging warplanes and strengthen its defense against restive neighbor North Korea.

South Korea has since conducted tests and negotiations, and dismissed concerns stemming from an engine fire on a U.S. Air Force F-35A jet in June that grounded the entire F-35 fleet for several weeks.

The U.S. government's head of the F-35 program said in an official document to the South Korean government that the engine failure was within the realm of possibility considered during development, one of the people said.

The F-35 program head also said the incident had no effect on the quality, price, delivery date and safety of the jets - a conclusion South Korea is viewing as a sort of guarantee, the person added.

A follow-up contract will be signed to allow basic maintenance of the jets within South Korea, the person said, with South Korea being free to choose the location of more involved maintenance.

The people declined to be identified as they were not authorized to speak to media about the deal.

"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.

South Korea decided to redraw the terms of an 8.3 trillion won tender to buy 60 jets last year after dropping an option to buy Boeing Co's (BA.N) F-15s in favor of jets with stealth capabilities, later reducing the purchase to an initial 40 aircraft.

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.

(Reporting by Joyce Lee; Editing by Christopher Cushing)