By Andrea Shalal-Esa

WASHINGTON (Reuters) - The Pentagon has reduced its withholding of progress payments on Lockheed Martin Corp's <LMT. N> F-35 fighter jet program to 2 percent from 5 percent after the company made "significant progress" toward fixing a deficient internal business system, according to a document obtained by Reuters on Monday.

Joe DellaVedova, spokesman for the Pentagon's F-35 program office, said the action had been taken at the end of August. He gave no details on the exact amount of money affected by the decision by the Defense Contracts Management Agency (DCMA).

The agency told Lockheed in a letter dated August 30 that it decided to reduce the withholding amount after seeing "significant progress" toward improvements in the company's earned value management system (EVMS), which helps the company track cost, schedule and other risks to the F-35 program.

It said Lockheed had made progress on 15 of 16 capabilities required to regain certification of the system, and the company was expected to show continued improvement in coming months.

Lockheed spokesman Michael Rein welcomed the news and said the company remained focused on executing the corrective action plan and regaining full certification of its EVMS system.

News of the reduced withholding comes amid other positive news for the $392 billion F-35 fighter program, which U. S. defense officials say has also made progress in flight test, technical issues and reducing production and operating costs.

The Pentagon's top acquisition official, Frank Kendall, told Reuters this month that the program was the Defense Department's most important conventional weapons priority and he would try to protect its funding despite mandatory across-the-board budget cuts due to take effect next month.

DCMA said it expected Lockheed to complete work on the one unfinished item, which was linked to the company's analysis of subcontractor schedule, and three other, final issues, on or before the targeted completion date of December 19.

The 2 percent withholding would be lifted once those items had been addressed, and all significant deficiencies had been corrected, DCMA said in the letter.

No comment was immediately available from the agency.

The DCMA, which has been critical of Lockheed's earned value management system since 2007, increased the withholding last year to 5 percent from 2 percent after the company failed to make timely and significant progress on fixing the system.

(Editing by Philip Barbara and Mohammad Zargham)

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