NEW YORK (Dow Jones) -- The Pentagon has rejected any notion that the contested bid submitted by Northrop Grumman (NYSE:NOC) and partner Airbus to build the country's next-generation aerial-refueling tanker might benefit from European government subsidies.

Airbus is a European Aeronautic Defence & Space Co. (EADSY) subsidiary.

In a letter dated June 17 to Rep. Rick Larsen, D-Wash., Undersecretary of Defense John Young wrote that U.S. and European leaders have accused each other of providing their respective aircraft industries with subsidies that are illegal under World Trade Organization rules.

"Neither the United States nor the European Communities has included in the scope of its claims before the WTO any assertion that military aircraft benefit from WTO-inconsistence subsidies or that its military aircraft industry has been harmed by such subsidies," Young said.

Los Angles-based Northrop Grumman (NYSE:NOC) (NOC) received a $35 billion contract to build the tankers, besting rival Boeing Co. (NYSE:BA) (BA) -- which in turn won a protest against the award with the Government Accountability Office earlier this month.

The Air Force now has until mid-August to respond to the GAO's request that it reopen the contract.

The February decision to award the contract to a partnership with a European company has been controversial, with politicians raising concerns over security and American jobs. The Air Force has consistently restated its position that the Northrop Grumman (NYSE:NOC) tanker is the right choice.

    (END) Dow Jones Newswires   06-27-08 0845   Copyright (c) 2008 Dow Jones & Company, Inc.