WASHINGTON (AP) – The U.S. Navy on Thursday said it was canceling a widely criticized Lockheed Martin Corp. contract to build a next-generation combat ship after negotiations to control cost overruns failed.

“We’re disappointed but we have to have it at a price we can afford,” Navy Admiral Charles Goddard said at a Pentagon press briefing to discuss the unusual decision.

Lockheed expressed disappointment over the Navy’s decision and accepted blame for cost overruns on the first LCS ship it has nearly completed.

After nearly a month of extensive negotiations with Bethesda, Md.-based Lockheed Martin, neither the Navy or the company could agree on a restructured contract that was acceptable to both parties and controlled costs on the Littoral Combat Ship (LCS) program.

In a statement, Bob Stevens, Lockheed’s president and chief executive, said: “We believe that our proposal was fully consistent with the Secretary’s stated desire to bring the benefits of increased competition to shipbuilding while holding the Navy’s industrial partners accountable for cost performance within their control.”

The defense contractor had submitted a final proposal to the Navy late Monday in hopes of salvaging the deal.

“Lockheed’s best offer is considered unaffordable by the department,” Goddard added.

The Navy ordered work halted on the start of the second Lockheed ship in January after cost estimates on the first ship, which is 75 percent completed, soared to at least $350 million from an initial price of $270 million.

Until now, Lockheed had blamed cost overruns on revised Navy requirements and material delays from subcontractors.

Negotiations will now be held on happens to and who pays for materials already ordered for the second ship. Lockheed likely will be paid for termination and stop-work order costs it incurred.

The Navy had initially awarded contracts for four LCS ships, two to Lockheed and two to Falls Church, Va.-based General Dynamics Corp., the parent company of Maine’s Bath Iron Works, which is the lead contractor on the two General Dynamics’ ships.

The General Dynamics contract remains under close review but is expected to proceed, the Navy said. Goddard warned that any unexpected cost overruns could result in the Navy restructuring the contract.

The Navy has also decided to put out bids for five more LCS ships, three in fiscal 2008 and two in fiscal 2009.

Lockheed spokesman Craig Quigley said it was soon to tell whether Lockheed would compete for those contracts.

Shares of Lockheed Martin were down 7 cents to $96.10 in aftermarket trading after ending the day down 45 cents to $96.16 on the New York Stock Exchange. Shares of General Dynamic rose 2 cents to $77.36 in aftermarket trading after closing up 62 cents to $77.34, also on the NYSE.

AP-ES-04-12-07 1935EDT