* To sign contract by year end
* PM says deal will create jobs in UK manufacturing
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LONDON, May 14 (Reuters) - Britain said on Thursday it will buy a third batch of Eurofighter aircraft and hopes to sign a contract by the end of the year, dispelling fears it would pull out of the project.
Britain and its partner nations, Germany, Italy and Spain, will continue negotiations with the aerospace industry to secure a deal to build the next tranche of advanced warplanes.
"This will strengthen Britain's defence capability and will create new jobs in advanced manufacturing that Britain needs to emerge stronger and fitter from this global downturn," Prime Minister Gordon Brown said in a statement.
With Britain in recession and public finances severely stretched, the future of the contract had been in doubt.
Defence and finance ministry officials held talks this week on the financial implications of Britain cancelling part of its Eurofighter contract, defence sources said.
The U.S. Pentagon last week sent Congress a fiscal 2010 budget plan that included proposed sweeping cuts to defence programmes including an end to funding for the F-22 fighter jet.
Under a long-standing agreement with its partners, Britain was obliged to buy 88 of the aircraft as part of a third production tranche.
That number has already been reduced to an initial 40 after a compromise negotiated by Germany, with the remainder offset for a later production run, dubbed tranche 3b.
Yet even the cost of the 40 jets -- of which 24 have already been set aside for Saudi Arabia -- was proving a tough commitment for Britain. The 16 it would actually take delivery of will cost around $1.6 billion, defence industry sources say.
Britain was under particular pressure from Germany to show its commitment to Eurofighter, which is being built by BAE Systems, Italy's Finmeccanica and European aerospace giant EADS .
Shares in the plane's manufacturers rose on the statement which lifted months of uncertainty over the fate of the combat jet.
At 0918 GMT shares in BAE Systems were up 0.1 percent, Finmeccanica rose 2 percent while EADs gained 2.1 percent. (Reporting by Peter Griffiths; editing by Mike Nesbit)