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U.S. Air Force Secretary Michael Donley told reporters the contract was worth over $30 billion and Boeing's shares rose 3.5 percent in after-hours trading.

Boeing, which could still face a contract protest from Airbus parent EADS, was awarded an initial $3.5 billion to design and deliver 18 planes.

It is the third effort in nearly decade to start replacing the Air Force's Boeing-built KC-135 Stratotankers, built before man first landed on the moon.

The contest has sparked transatlantic tensions and clashes in Congress among lawmakers eager to bring high-paying aerospace jobs to their states.

"Boeing was the clear winner," Deputy Defense Secretary William Lynn told reporters at the Pentagon.

He said EADS could protest the decision, but the Pentagon was convinced the decision was fair and transparent and there would be no grounds for a protest.

"We think we've established a clear, a transparent and an open process and we think we've executed on that and it will not yield grounds for protest," Lynn told the briefing.

EADS last week said it would only protest if it saw egregious errors. On Thursday, it expressed disappointment and concern about the decision, but said the contract was just "one business opportunity among many" in the United States.

EADS did not say if it planned a protest. Company officials say they will wait until after a formal briefing by the Air Force, which is likely to occur on Wednesday.

EADS has 10 days to file a formal protest after a contract award and its congressional backers can also try to block the award legislatively. Several Alabama lawmakers said they would examine the decision carefully to ensure it was fair.

Teal Group analyst Richard Aboulafia called the decision "a major surprise" and said if it holds, Boeing will have succeeded in blocking EADS's biggest defense initiative.

Aerial refueling tankers supply fuel to fighter planes and other aircraft in mid-flight, extending the range of military operations.

Air Force Chief of Staff General Norton Schwartz said he was pleased that troops would finally get a new refueling plane. "Let me just say that I'm pleased that this has produced an outcome ... that we'll get about delivering a capability that's long overdue -- and we'll stop talking about it."

EADS and Boeing, arch rivals in the market for passenger jets, have fought bitterly in public over the contest with expensive advertisements while their respective supporters have battled it out at dueling news conferences.

U.S. crude oil futures were up more than $2 a barrel at above $100 on mounting fears that the chaos in Libya that has cut more than a quarter of OPEC-member Libya's crude output could spread to other major producers in the region, including top exporter Saudi Arabia.

European stocks were down around 0.5 percent in morning trade while Tokyo's Nikkei average lost 1.2 percent, adding to this week's global sell-off triggered by escalating violence in Libya.

The spotlight will be on General Motors Co (GM.N) on Thursday, as the company is expected to report full-year earnings of more than $5 billion, its first annual profit in six years, although rising commodity prices and its European operations are seen as putting a drag on the fourth-quarter performance.

Limited Brands Inc (LTD.N) said on Wednesday fourth-quarter net income rose 27 percent, in-line with its recently raised forecast, as fewer markdowns and more full-priced selling boosted results.

The United States looked set on Thursday to announce the winner of a $35 billion battle between Boeing and Airbus to supply in-flight refueling aircraft to the U.S. Air Force after two failed attempts to renew its aging fleet.

Citigroup Inc (C.N) will restructure its North American retail bank and credit card units, according to internal memos obtained by Reuters on Wednesday.

On the earnings front, companies due to report on Thursday include AIG (AIG.N), Applied Materials (AMAT.O), Gap (GPS.N), Mylan (MYL.O), Safeway (SWY.N) and Target.

Economic data due includes durable goods orders, new home sales and jobless claims.

U.S. stocks dropped for a second straight session on Wednesday as Libya's violence sent oil prices up and tech shares sank.

The Dow Jones industrial average .DJI fell 107.01 points, or 0.88 percent, to 12,105.78. The Standard & Poor's 500 Index .SPX lost 8.04 points, or 0.61 percent, to 1,307.40. The Nasdaq Composite Index .IXIC declined 33.43 points, or 1.21 percent, to 2,722.99.

(Reporting by Blaise Robinson; Editing by Greg Mahlich)

Disruption stemming from the revolt in the world's No. 12 exporter Libya has cut at least 400,000 barrels per day (bpd) of the country's 1.6 million bpd output, according to Reuters calculations.

Brent crude on Thursday spiked nearly $7 in the 90 minutes to 0800 GMT. It rallied as much as $8.54 or 7.7 percent a barrel to a peak of $119.79, trimming gains to trade up $6.00 at $117.25 by 0902 GMT. The contract has risen nearly 14 percent in four days.

Reuters market analyst Wang Tao says technical charts show Brent could be on course for a rise to $158 per barrel in 2011, well above its 2008 high of $147.50, while he expects U.S. crude to touch $159 per barrel.

U.S. crude for April delivery rose as high as $103.41, the highest September 2009. It traded up $4.31 at $102.41 at 0903 GMT.

The cuts from Libya represent the first disruption to supply as a direct result of protests that have swept through the oil producing regions of North Africa and the Middle East.

The concern for oil markets is how unrest might affect Saudi Arabia, which not only pumps around 10 percent of the world's oil but is also the only holder of significant spare crude production capacity that could be used to plug supply outages such as those being suffered by Libya.

"The situation in the Middle East is causing a lot of uncertainty in the market now, the risk of disruption to major producers in the region is what every investor is watching now,"

said Ken Hasegawa, a commodity derivatives manager at Newedge brokerage in Tokyo.

Without Saudi Arabia's 4 million bpd of spare capacity, there is little margin in the global oil supply system to deal with output disruption.

To date, the kingdom has escaped the popular protests against poverty, corruption and oppression that have raged across the Arab world, toppling the long-time leaders of Egypt and Tunisia and spreading as far as Saudi neighbor Bahrain.

Goldman Sachs said on Thursday oil markets were driven by fear of contagion to other producing nations and that another disruption could create severe oil shortages and require demand rationing.

"The market cannot accommodate another disruption, in our view, with the problems in Libya potentially absorbing half of OPEC's spare capacity," Jeffrey Currie said in a research note.

Saudi King Abdullah returned home on Wednesday from a three-month medical absence and unveiled benefits for Saudis worth some $37 billion in an apparent bid to insulate the world's top oil exporter from the protests across the Arab world.

Hundreds of people on Wednesday backed a Facebook page campaigning for a "day of rage" across the kingdom on March 11 to demand an elected ruler, greater freedom for women and the release of political prisoners.

Copper also bounced off one-month lows, although the dollar stayed on the back foot as some investors worry that the U.S. economy would be vulnerable to high oil prices, given its reliance on consumer spending to drive growth.

London Brent crude rose as high as $113 a barrel for the first time since September 2008, having gained nearly 10 percent in the past four sessions. U.S. crude last traded at around $99.38 a barrel, a whisker away from Wednesday's high of $100.

Worries that higher energy prices will crimp corporate profits had sparked a steep selloff in Asian stocks in the past two sessions, but that looked to be losing its punch.

Japan's Nikkei 225 index .N225, while still 0.4 percent lower on the day, was off its lows and stocks elsewhere in Asia .MIAPJ0000PUS erased early losses to be up 0.4 percent.

"As Japanese stocks have tumbled for the past two sessions (losing 2.6 percent), today's losses may not be sharp," said Masumi Yamamoto, a market analyst at Daiwa Securities Capital Markets.

Hong Kong's Hang Seng .HSI put on 0.2 percent and China's Shanghai Composite Index .SSEC edged up 0.2 percent. Gains in U.S. stock futures suggest a steadier start on Wall Street after two sessions of declines.

Gold, a traditional safe haven in times of trouble, traded at around $1,412 an ounce, not far from a record high around $1,430 set in December.

Copper gained 1.1 percent to $9,526 a metric ton, climbing off a one-month low of $9,365.

The dollar index .DXY, which tracks its performance against a basket of major currencies, shed 0.3 percent to 77.173.

Against the Swiss franc, the dollar fell to a record low at around 0.9277 franc, surpassing the previous trough of 0.9301 set at the end of the year.

The euro held firm at $1.3776, coming within easy reach of its February 2 peak of $1.3862, helped also by recent hawkish comments on inflation by European Central Bank officials, which raised expectations the ECB will hike interest rates before the Federal Reserve.

"There may be a realization that if oil prices rise sharply, that would hit all the developed countries and in that sense it effects every major currency the same," said Tsutomu Soma, manager of foreign bonds at Okasan Securities.

"And if the impact from the Middle East crisis is roughly equal on each currency, you could argue that currencies with a yield advantage will benefit at the end of the day," Soma said.

The New Zealand dollar continued to struggle at two-month lows below $0.7500, with markets now pricing in an 88 percent chance that the next rate move will be a 25 basis point cut.

The move followed the deadly earthquake that hit the country's second biggest city of Christchurch Tuesday.

(Additional reporting by Ayai Tomisawa and Hideyuki Sano in Tokyo; Editing by Tomasz Janowski and Yoko Nishikawa)