McDonnell Confirms C-17 Talks : Aerospace: Contractor says Pentagon has offered up to $450 million to be taken as a charge against earnings.

McDonnell Douglas Corp. confirmed Thursday that it is in talks with the Pentagon over its controversial C-17 cargo jet program as part of a possible accord that could result in the company taking a charge against earnings of up to $450 million.

Most of the jet transport is constructed in Long Beach by about 11,000 employees.

McDonnell’s statement came a day after it was disclosed that the C-17 project--plagued by technical flaws and at least $1 billion in cost overruns--would probably be slashed to about 40 planes from 120.

John Deutch, undersecretary of defense, reportedly told a closed-door congressional panel earlier this week that the Pentagon would offer $400 million to the St. Louis-based company in exchange for McDonnell not pursuing more than $1 billion in C-17-related claims against the government.

But such a settlement would not cover McDonnell’s investment in the plane, based on the company’s acknowledgment that it would still face the big charge.

However, McDonnell did not specify whether the proposed settlement covers the 40-plane order mentioned by Deutch or some other level of production. A company spokesman declined to elaborate.

McDonnell did say the charge “would not result in any significant adverse cash impact” on the company and would not be applied to its third-quarter financial results, which are scheduled to be announced Monday.

McDonnell also noted that it is still possible that the C-17 could be canceled, or that the existing contracts--in which the company is building the first 20 C-17s--might not be extended.

McDonnell’s statement was released after trading ended on the New York Stock Exchange, where McDonnell’s stock earlier jumped $2.625 a share to $92.875. The gain reflected an easing of Wall Street’s concern that the C-17 program might be canceled altogether, said Jack Modzelweski, an analyst at Paine Webber.