But even Boeing's supporters in the Congress said the deal was not a "slam dunk" for the company's 767 tanker, and the Pentagon would be under increased pressure to extract a good bargain.
Northrop's European partner, Airbus parent EADS, could still mount a bid on its own, sources told Reuters, although a bid without a US partner would likely become a bigger political target.
"Why do they need Northrop? I think they have no choice but to bid," said one European source, who was not authorized to speak on the record.
Northrop's decision, announced on Monday, puts the tanker contract within Boeing's reach nearly nine years after the Air Force first mapped out a sole-source deal with Boeing that was later killed by Congress after a huge procurement scandal.
Northrop and EADS won the last competition in February 2008 with a bigger A330-based plane, but the Pentagon canceled that deal after government auditors upheld a Boeing protest.
Northrop said it would not protest the final request for proposals to avoid any further delay in replacement of the current fleet of nearly 50-year-old KC-135 tankers, although it felt it had "substantial grounds."
One industry source said that lack of a protest removed a substantial obstacle to a solo bid by EADS, which is keen to expand its footprint in the US market where it already is prime contractor for large US Army helicopter program.
Congressional aides and military analysts said the European company would face a tough uphill political battle on its own, given U.S. concerns about alleged European subsidies to Airbus and delays in EADS' A400M transport plane program.
In Washington, EADS spokesman Guy Hicks did not explicitly rule out a solo bid.
"Our preferred option when we entered the KC-X competition was to team with Northrop Grumman — a partnership which resulted in winning the first replacement competition. Northrop Grumman has decided not to compete and that significantly limits the options," Hicks said.
The Pentagon reacted with disappointment to Northrop's decision, and insisted the revamped rules were structured fairly and would have let both teams compete effectively.
Deputy Defense Secretary William Lynn also said the Pentagon strongly supported transatlantic defense industrial ties, in what one analyst said appeared to be an invitation to EADS to mount its own bid as prime contractor.
Northrop Chief Executive Wes Bush called Lynn and other top Pentagon officials on Monday to tell them Northrop would not bid because it felt the competition rules clearly favored Boeing, news first reported by Reuters.
In a statement issued after the US stock market closed, Bush said Northrop remained convinced that the A330-based tanker it offered with EADS would be a better value for the Pentagon, but said it would be irresponsible to shareholders to pursue a bid when the rules so clearly favored Boeing.
Bush said Northrop recognized the decision would likely lead to "a sole-source outcome for Boeing," but urged the Pentagon to keep the outcome of the last contest in mind.
He said the Air Force had expected to pay $184 million per plane for the first 68 tankers, including development costs, and said the choice of a smaller plane should mean that the cost would be "much less" this time around.
One industry source said the cost information from the last competition was irrelevant, given that it was based on pricing for a heavily discounted airplane.
Boeing said it remained focused on the Air Force's requirements and would submit a competitive proposal. It said its smaller 767 tanker would save the government $10 billion in fuel costs alone over the next 40 years.
Northrop's decision prompted disappointment and frustration among its supporters in Congress and in Alabama, where Northrop and EADS had planned to assemble their A330 tankers, creating 48,000 jobs around the country.
Representative Jo Bonner said he was disappointed that the Pentagon would now pursue a sole-source contract with Boeing despite President Barack Obama's policy against such deals.
"I am outraged at the Defense Department's bungling of this contract for what is now the third time," Bonner said. "The president must now intervene to protect the interests of the taxpayer and the men and women of our military."
Senator Patty Murray, a strong Boeing supporter from Washington state, said Northrop's decision did not remove pressure from Boeing to meet the government's requirements.
"Today's news is by no means the end of the line, and this contract is no slam dunk. It's important to remember that the American people are the customers, and that we drive a hard bargain," she said.
