* Administration said close to notifying Congress
* Sale could spur spread of hunter-killer drones
* Italy expected to use "Reaper" drones in Afghanistan
By Jim Wolf
WASHINGTON, May 29 (Reuters) - President Barack Obama's administration appears set to notify the U.S. Congress of plans to arm a fleet of Italian MQ-9 Reaper drones, a step that may spur a wider spread of remotely piloted hunter-killer aircraft.
The administration could move ahead within two weeks on the proposal to let Italy join Britain in deploying U.S. drones with weapons such as laser-guided bombs and Hellfire missiles, U.S. officials said.
Italy has a fleet of six Reapers. The sale of the technology to arm them, including bomb racks and "weaponization" kits costing up to $17 million, would help the United States redistribute the burden of its global military operations as the Pentagon's budget is being squeezed by deficit-reduction requirements.
Aides to Obama have been informally consulting the House of Representatives' and Senate's foreign affairs committees about the proposed sale to Italy since last year, congressional staff said.
The latest such period of "pre-consultations" ended May 27 without a move to block the sale, according to the Wall Street Journal, which first reported the coming formal notification to lawmakers.
A transfer to Italy would make it harder for the United States to deny armed-drone technology if asked for it by other members of the 28-country NATO alliance or by close U.S. partners such as South Korea, Japan and Australia, arms-sale analysts said.
"I think that if you sell armed drones to Italy, you will very likely make a decision that any member of NATO that wants them can also get them," said a former congressional staff member who followed the issue.
Some lawmakers fear that a decision to arm Italian drones may spur overseas sales of related technology by Israel, Russia and China.
The United States has used its MQ-9s to hunt and kill members of al Qaeda and its allies in Afghanistan, Iraq, Yemen, Somalia and Pakistani tribal areas.
Upgraded Italian Reapers would be able to fire weapons such as Lockheed Martin Corp's next generation AGM-114R, or Hellfire "Romeo," designed to knock out "hard, soft and enclosed targets," according to Lockheed, the Pentagon's No. 1 supplier by sales.
Britain, the first foreign country to get U.S. technology to arm its Reapers, is considered a special case. Many U.S. officials and members of Congress view it as Washington's staunchest and most reliable ally.
The State Department does not comment on proposed sales of U.S. military hardware until formal notifications have been completed. But a State Department official described Italy as a strong NATO ally which contributes significantly to coalition operations.
"The transfer of U.S. defense articles and service to allies like Italy enables us to work together more effectively to meet shared security challenges," said the official, who declined to be named.
Senator Dianne Feinstein, chairwoman of the Senate Intelligence Committee, has publicly opposed the transfer of armed drones. "There are some military technologies that I believe should not be shared with other countries, regardless of how close our partnership," Feinstein, a California Democrat, said last year.
She said she would put armed drones in the category of weapons the United States should try to rein in, not spread.
Turkey is among countries that have been seeking to buy U.S. unmanned aerial vehicles, or UAVs. The MQ-9 Reaper is larger and more capable than the earlier MQ-1 Predator, both built by General Atomics.
Turkish President Abdullah Gul said on the sidelines of a NATO summit in Chicago last week that Obama was leaning toward selling UAVs to Turkey, which has fought separatist Kurdish rebels for decades in a conflict that has killed 40,000 people.
"The administration's position (toward a sale) is favorable," Turkey's state-run Anadolu news agency quoted Gul as saying after he met Obama. "They are trying to convince Congress."
Under U.S. law a proposed U.S. arms sale may proceed unless lawmakers enact joint resolution barring it, an event that has never occurred.
The Obama administration says that all exports of sensitive military technology are considered on a case-by-case basis under a general policy of "restraint," taking into account national security and foreign-policy considerations as well as U.S. multilateral commitments.
Purchasers of U.S.-made military systems must agree to a strict set of "end-use" conditions designed to limit the system to approved uses such as self-defense and United Nations missions. They also must agree to let the United States monitor their adherence to these conditions.
Italy has sought to arm its drones for use in Afghanistan, where it maintains about 3,950 troops. But it initially wanted the drones themselves for such things as border patrols, the former congressional staff member said.
TEAL Group, a U.S. aerospace consultancy, estimated in April that worldwide UAV spending will almost double over the next decade, totaling more than $89 billion in the next 10 years.