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UPDATE 3-U.S. FAA downgrades India aviation rating; Air India, Jet hit

* India cut to Category 2 for not complying with safety oversights

* Indian carriers cannot increase flights to the United States

* India hopes to resolve FAA concerns by March, to seek review

(Adds U.S. State Department comment, paragraphs 17-20)

NEW DELHI, Jan 31 (Reuters) - U.S. authorities have downgraded India's aviation safety rating, citing a lack of safety oversight, meaning Indian carriers cannot increase flights to the United States and face extra checks for existing ones.

India's government said it expected to resolve by March all concerns raised by the U.S. Federal Aviation Administration, including appointing an adequate number of flight operation inspectors, and would approach the U.S. regulator for a review of its decision.

"The FAA has determined that India at this time is not in compliance with the international standards for aviation safety oversight," the U.S. regulator told India in a communication, extracts of which were released by the Indian aviation ministry.

Jet Airways and state-run Air India, the only two carriers that fly from India to the United States, would be hit by the downgrade. Air India has 21 weekly flights between India and the United States, while Jet has seven.

Jet Airways shares closed 3.7 percent lower after the news in a Mumbai market that ended 0.3 percent higher.

"It's very disappointing and also surprising," Indian Aviation Minister Ajit Singh told a news briefing on Friday after the FAA told Indian authorities that it was downgrading the country to Category 2 from Category 1.

"In our view, 95 percent of all the issues raised have been solved," Singh said, adding they would address all of the FAA's concerns by March.

India joins countries such as Indonesia, the Philippines and Bangladesh which have a Category 2 rating. As of Nov. 22, the FAA kept 81 of the 96 countries reviewed in Category 1.

Amber Dubey, head of aerospace and defence at consultancy KPMG's Indian unit, said safety regulators in some other countries may follow suit after the FAA downgrade, which would then affect carriers like IndiGo and SpiceJet, which have flights to Asian and Middle Eastern countries.

"FAA's downgrade typically has a domino effect," Dubey said.

The European Aviation Safety Agency said on Friday it was closely monitoring operations by non-European-Union airlines but so far had "no major concerns" with regard to India.

HEIGHTENED SURVEILLANCE

Airlines from countries rated Category 2 can continue operations at current levels under "heightened FAA surveillance" but cannot expand or change services to the United States, as per rules of the FAA's International Aviation Safety Assessments programme.

State-run Air India currently does not have any plan to increase flights between India and the United States, Prabhat Kumar, head of India's aviation regulatory body, told reporters.

Jet Airways, which last year sold a 24 percent stake to Abu Dhabi's Etihad and is expanding its international flights, did not reply to an email seeking a comment.

The FAA, which periodically reviews air safety preparedness of different countries, audited the Indian aviation regulator in September and December last year and had raised issues including lack of adequate number of flight inspection safety officers and training of officers who certify a plane is airworthy.

India earlier this week approved appointing 75 officers in a bid to avert a downgrade and said it had addressed 29 of the 31 issues raised by the FAA's safety audit.

U.S. State Department spokeswoman Marie Harf said the United States and India were committed to restoring India to a Category 1 rating as soon as possible and an FAA team was in India in part to discuss how to go about doing that.

She said the decision had been a regulatory one based on standards of the U.N.'s International Civil Aviation Organization and had had nothing to do with a dispute that blew up between the United States and India last year which led to the effective expulsion of an Indian diplomat accused of visa fraud and underpaying her maid.

"This was a regulatory decision," Harf told a regular news briefing. "I don't know how much leeway we have in those, but it's my understanding that this was all made inside a regulatory framework that has very specific criteria countries have to meet under ICAO standards that we're all party to.

"These aren't our standards. They're the ICAO standards everyone has to live under. And we're committed to working with India to help them get back to a Category One rating."

(Additional reporting by Maria Sheahan in Frankfurt and David Brunnstrom in Washington; Editing by David Evans and James Dalgleish)