UPDATE 1-US Navy award keeps Lockheed LCS work going

* U.S. Navy keeps production alive at shipyard

* Navy makes progress in Lockheed contract talks

* No mention of progress with General Dynamics talks (Adds details, background)

By Andrea Shalal-Esa

WASHINGTON, March 2 (Reuters) - The U.S. Navy on Monday awarded Lockheed Martin Corp (LMT.N) a contract modification to allow continued work on the Littoral Combat Ship (LCS) program and preserve production capability at the Wisconsin shipyard where a subcontractor is building the ships.

The small, agile LCS vessels that are being built in a competition between Lockheed and General Dynamics (GD.N) have been plagued by cost overruns. The ships are designed to counter threats in contested coastal waters and have a maximum speed of more than 40 knots, compared with 30-plus knots for the Navy's larger surface warships.

Navy spokesman Lt. Cmdr. Victor Chen said the Navy was making progress in talks with Lockheed about a contract for a second LCS ship in fiscal 2009, which ends on Sept. 30.

The amount of Monday's contract modification with Lockheed was not disclosed because it was part of the negotiations about ships to be built in fiscal 2009 and 2010, Chen said.

The Navy was also continuing negotiations with General Dynamics, which is working on a separate LCS design, Chen said, but he did not make reference to any progress in those talks.