BERLIN (Reuters) - The German defense ministry expects to announce next steps by the end of the year in its drive to replace 85 aging Tornado fighter jets that will cost billions of euros.

“There will be a decision this year,” a ministry spokesman said, citing a pledge in July by Defense Minister Ursula von der Leyen to move ahead with the program in 2018. The spokesman gave no further details.

Sources familiar with the process said the ministry was likely to narrow the field of potential replacement jets from four to two -- the Eurofighter Typhoon built by Airbus, Britain’s BAE Systems and Italy’s Leonardo SpA and most likely, the Lockheed Martin F-35.

“It’s another step in the process, not the actual procurement decision,” said one of the sources, noting that funds would first have to be earmarked in the German budget.

Von der Leyen favours a European solution, but the ministry also reviewed data submitted in April by the U.S. government on the F-35, and the F-15 and F/A-18E/F jets, both built by Boeing .

No comment was immediately available from Boeing or Lockheed. An Airbus spokesman said it was important for the process to move forward to enable the German air force to begin retiring the Tornado jets in 2025.

Several options have been studied, including buying one type of jet to replace the Tornado jets, a split buy of two aircraft types, and extending the life of the Tornados.

However the ministry in August asked potential bidders if they could deliver new warplanes before the initial target date of 2025, a move sources said reflected growing concerns about the cost of keeping the Tornados flying longer.

NUCLEAR CAPABILITY

A key factor will be the ability of the new jets to carry and deliver nuclear bombs. Germany is not a nuclear power, but hosts some U.S. nuclear warheads under NATO’s nuclear-sharing policy and operates a number of Tornados that can deliver them.

One proposal calls for Germany to buy 45 Lockheed F-35 jets to replace those Tornados, and about 75 new Eurofighters to replace both the other Tornados and a first batch of Eurofighters delivered between 2003 and 2008, sources said.

Buying F-35s would allow Germany to keep a mixed fleet of fighter jets, a requirement in its military strategy, while averting costly modifications to the Eurofighter.

Two of the sources said Germany had not yet commissioned a mandatory U.S. study of the certification issue, which could take 12 to 18 months to complete. Achieving certification for the Eurofighter could ultimately cost over 700 million euros and take well over seven years, they added.

Lockheed last week won a U.S. contract valued at up to $83.1 million to develop, integrate and test the needed software and hardware required for the F-35A to carry B61-12 nuclear bombs, with the work to be completed in February 2024.

Sources familiar with the process said that would allow Lockheed to offer Germany deliveries of F-35 aircraft a year or more ahead of the 2025 target, enabling pilots to begin a year or two of required training at a U.S. air base in Arizona.