* Cuts 371 UK jobs in Typhoon production
* Also reduces jobs, capacity at Australian shipyard
* Sees 2015 earnings flat, downgrade brings co in line withmarket
* Says outlook for defence spending improving (Adds company retaining U.S. manpower and services business)
By Paul Sandle and Sarah Young
LONDON, Nov 13 (Reuters) - BAE Systems will slowproduction of its Typhoon fighter jet and cut capacity at itsWilliamstown shipyard in Australia, the cost of which will meanearnings will not grow this year, the company said on Thursday.
Europe's biggest defence contractor said the longer termoutlook was brightened by increases in defence spending in theUnited States and other markets.
The company has been waiting for a major order for Typhoonjets from Saudi Arabia. Analysts had started to fear the dealwould not materialise but the company said it expected sales tocome through, albeit spread over a longer period.
The production cut, which will result in the loss of 371British jobs, would ensure the fighter jet was cost competitiveover the medium term, said Chief Executive Ian King.
He noted that BAE Systems' relationship with Saudi Arabiaspanned half a century and that the Kingdom recently ordered 22of its Hawk advanced jet trainers.
"We are confident of future Typhoon export success and wehave not changed our planning assumptions on the number ofaircraft we expect to sell," he said.
BAE said however that Typhoon sales were expected to reducefrom about 1.3 billion pounds in 2015 to 1.1 billion in 2016after the production changes.
Shares in BAE Systems, which have fallen 20 percent from a15-year high of 549 pence in March, were trading up 4.4 percentat 457 pence at 1210 GMT.
"It's kind of a relief they've bitten the bullet on twothings...and they're saying that there's an improving businessenvironment, talking about the U.S. budget," said analyst EdwardStacey at Haitong Research.
British aero-engines maker Rolls-Royce issued its fourthprofit warning in little over a year on Thursday, wiping a fifthoff its share value.
BAE said the short-term cost of reducing Typhoon product andan impairment in the carrying value of the Williamstown shipyardin Australia would result in expected underlying earnings pershare for 2015 of around 38 pence, flat on 2014.
It had said in February that for 2015 it expected underlyingearnings per share to be "marginally higher", a forecast thatwas partly dependent on a new Saudi Arabia order and work forits shipyards in Australia.
The downgrade brings the company in line with current marketexpectations, as analysts recognized the Typhoon order wasunlikely to land this year.
King said the outlook in Britain and the United States wasmore positive, noting that a recent U.S. budget deal wasexpected to result in defence spending above previous budgetcontrol caps.
BAE could also win a deal to sell 20 more Hawks to Indiaduring a visit to Britain this week by Indian Prime MinisterNarendra Modi, according to reports.
The company also said it had decided on Thursday to retainits U.S. manpower and services businesses after a reviewtriggered by interest from buyers earlier in the year.
"The review has now been completed and despite third-partyinterest, we have determined that retaining these businesseswill deliver greater value," King said.
"I'm pleased to say that these businesses are continuing toperform well and win new orders." (Editing by Keith Weir)