The navy wanted to change to a fixed price incentive contract after costs soared in the construction of the first of the small, fast, networked vessels designed for combat operations close to shore.

"The navy worked closely with General Dynamics to try to restructure the agreement for LCS 4 to more equitably balance cost and risk, but could not come to terms and conditions that were acceptable to both parties," the navy said.

The navy awarded contracts in 2004 to General Dynamics and Lockheed Martin Maritime Systems and Sensors to each build two of the ships.

The second of the Lockheed Martin vessels, LC3, was terminated in April after it failed to reach agreement with the navy on controlling costs.

The General Dynamics first vessel, designated LCS 2, was hit by spiralling costs.

Navy Secretary Donald Winter said the decision to terminate construction of LCS 4, the second General Dynamics vessel, was difficult.

But he said "active oversight and strict cost controls in the early years are necessary to ensuring we can deliver these ships to the fleet over the long term."

Admiral Gary Roughead, the new chief of naval operations, said he remained committed to the Littoral Combat Ship. The navy plans to build 55 of them.

"We need this ship," he said. "It is very important that our acquisition efforts produce the right littoral combat ship capability to the fleet at the right cost."

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