* Cuts 371 UK jobs in Typhoon production
* Also reduces jobs, capacity at Australian shipyard
* Sees 2015 earnings flat, downgrade brings co in line with market
* 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 BAES.L will slow production of its Typhoon fighter jet and cut capacity at its Williamstown shipyard in Australia, the cost of which will mean earnings will not grow this year, the company said on Thursday.
Europe's biggest defence contractor said the longer term outlook was brightened by increases in defence spending in the United States and other markets.
The company has been waiting for a major order for Typhoon jets from Saudi Arabia. Analysts had started to fear the deal would not materialise but the company said it expected sales to come through, albeit spread over a longer period.
The production cut, which will result in the loss of 371 British jobs, would ensure the fighter jet was cost competitive over the medium term, said Chief Executive Ian King.
He noted that BAE Systems' relationship with Saudi Arabia spanned half a century and that the Kingdom recently ordered 22 of its Hawk advanced jet trainers.
"We are confident of future Typhoon export success and we have not changed our planning assumptions on the number of aircraft we expect to sell," he said.
BAE said however that Typhoon sales were expected to reduce from about 1.3 billion pounds in 2015 to 1.1 billion in 2016 after the production changes.
Shares in BAE Systems, which have fallen 20 percent from a 15-year high of 549 pence in March, were trading up 4.4 percent at 457 pence at 1210 GMT.
"It's kind of a relief they've bitten the bullet on two things...and they're saying that there's an improving business environment, talking about the U.S. budget," said analyst Edward Stacey at Haitong Research.
British aero-engines maker Rolls-Royce (L:RR) issued its fourth profit warning in little over a year on Thursday, wiping a fifth off its share value. urn:newsml:reuters.com:*:nL8N1371GK
BAE said the short-term cost of reducing Typhoon product and an impairment in the carrying value of the Williamstown shipyard in Australia would result in expected underlying earnings per share for 2015 of around 38 pence, flat on 2014.
It had said in February that for 2015 it expected underlying earnings per share to be "marginally higher", a forecast that was partly dependent on a new Saudi Arabia order and work for its shipyards in Australia.
The downgrade brings the company in line with current market expectations, as analysts recognized the Typhoon order was unlikely to land this year.
King said the outlook in Britain and the United States was more positive, noting that a recent U.S. budget deal was expected to result in defence spending above previous budget control caps.
BAE could also win a deal to sell 20 more Hawks to India during a visit to Britain this week by Indian Prime Minister Narendra Modi, according to reports. ID:nL3N13638S
The company also said it had decided on Thursday to retain its U.S. manpower and services businesses after a review triggered by interest from buyers earlier in the year. urn:newsml:reuters.com:*:nL1N1353DT
"The review has now been completed and despite third-party interest, we have determined that retaining these businesses will deliver greater value," King said.
"I'm pleased to say that these businesses are continuing to perform well and win new orders."
(Editing by Keith Weir)