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UPDATE 1-Canada changing rules for fighter jet competition to allow Lockheed Martin bid -source

Martin bid -source@ (Adds quote, details, background)

OTTAWA, May 9 (Reuters) - Canada is changing the rules of its multibillion-dollar competition for 88 new fighter jets to allow Lockheed Martin Corp to submit a bid, a Canadian government source said on Thursday.

The source, who requested anonymity given the sensitivity of the situation, said Ottawa was acting after the United States complained the original rules would exclude Lockheed Martin's F-35 fighter, the plane the Canadian air force wants.

Canada initially said bidders for the contract - worth between C$15 billion and C$19 billion ($11.1 billion-$14.1 billion) - must commit to give Canadian businesses 100 percent of the value of the deal in so-called economic benefits. But that contradicts rules of the consortium that developed the F-35 fighter, a group of which Canada is a member.

The source said Ottawa would drop the requirement that firms give a legally binding guarantee they would spend the money in Canada. The planes will be judged on three criteria - capability, price and benefits.

"A bidder that is not willing and able to sign a contract and guarantee them (the benefits) can still bid and still be competitive but they will get less points in the economic benefits category" than firms that do offer a watertight commitment, said the source.

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. (Reporting by David Ljunggren; Editing by Peter Cooney)