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OTTAWA, May 7 (Reuters) - Canada's government is trying to address complaints about its military procurement process that have prompted threats from Washington to block Ottawa from buying Lockheed Martin Corp's F-35, the Canadian air force's preferred option for its new fighter jet, a government source said on Thursday.
U.S. unhappiness about the way Ottawa is handling the race to supply 88 new jets is the latest challenge for a trouble-plagued process that has dragged on for more than a decade, embarrassing Conservative and Liberal governments in Canada.
The affair could be another problem for Liberal Prime Minister Justin Trudeau ahead of an election in October, on top of allegations of interference in a corporate corruption case.
Canada's procurement rules say bidders for the jet contract - worth between C$15 billion and C$19 billion ($11.1 billion-$14.1 billion) - must promise to give Canadian businesses billions of dollars in so-called industrial benefits. But this contradicts rules of the consortium that developed the F-35 fighter, a group of which Canada is a member.
The U.S. military's F-35 office wrote to Ottawa last December to say the plane would not take part in the competition unless Canada dropped the demand for benefits. The letter was obtained by the Ottawa-based Macdonald-Laurier think tank.
Still, dropping the demand would likely infuriate the other firms in the race: Boeing Co, Airbus SE and Saab AB - and could prompt them to scrap their bids.
The Canadian government source said the firms involved had raised "a whole bunch" of different questions and concerns about the process.
"This (the U.S. letter) is one of them and there has been a great deal of work going on, which is not yet completed, to address as many of those concerns as possible while keeping the playing field level," said source, who requested anonymity given the sensitivity of the situation.
Procurement Minister Carla Qualtrough, in overall charge of the competition, told reporters on Tuesday that "as we design this process for fighter jet procurement, it has to be open, it has to be transparent, it has to be competitive".
Two defense sources said one option would be to count the money Canada has already invested in the F-35 project as an industrial benefit. Although Ottawa is due to issue a final list of requirements for the jet next month, the sources predicted that would be delayed until after the election.
In response, the Canadian source said "we are still saying quite clearly we are going to get (the requirements) out soon".
Canada has been trying unsuccessfully for almost a decade to buy replacements for its aging F-18 fighters. The former Conservative administration said in 2010 it would buy 65 F-35s but later scrapped the decision, triggering years of delays.
Trudeau came to power in 2015 vowing not to buy the F-35 on the grounds that it was too costly, but Ottawa has since softened its line.
The Conservatives, now in opposition, said in a statement they would "immediately start an open competition to select a new fighter jet" if they won the October election. ($1 = 1.3480 Canadian dollars) (Reporting by David Ljunggren; Editing by David Gregorio)