By Andrea Shalal

WASHINGTON, March 31 (Reuters) - A problem that has prevented Boeing Co 's KC-46A tanker aircraft from transferring fuel to a C-17 transport plane may delay a Pentagon decision approving low-rate production of the new tanker in May, the U.S. Air Force said on Thursday.

"We don't yet know the schedule impact to the planned May Milestone C decision, but the problem is well understood and we don't expect an extended delay," said Air Force spokesman Daryl Mayer.

Mayer said the issue arose during testing of the refueling boom that is used to transfer fuel from the 767-based tanker aircraft to a C-17 transport plane, also built by Boeing.

The issue marks another setback for the Boeing program, which has run into delays due to wiring issues and other problems. However the program's projected cost dropped by $3.5 billion to $48.2 billion in a Pentagon report to Congress.

Mayer said the Boeing and Air Force flight test team recorded higher-than-expected boom axial loads during testing of the tanker's ability to offload fuel to a C-17 cargo plane.

Boeing spokesman Todd Blecher said Boeing was looking at ways to resolve the issue.

"We expected to find items like this in development test and we are evaluating system changes to improve boom response. Over the coming weeks, we will have a better understanding of program impacts, if any," Blecher said.

Boeing and the Air Force expect to know about a possible delay in the Pentagon's low-rate production decision after the company tests its proposed fix for the issue in mid-April, according to a source familiar with the matter.

The company must also still refuel an A-10 aircraft. It has successfully refueled F-16, F/A-18 and AV-8B fighter jets, and has been refueled itself by a KC-10 tanker during the testing required to begin low-rate production.

Boeing and Air Force officials say they still expect Boeing to meet its August 2017 delivery date for the first 18 refueling planes, despite a report by the Pentagon's Contract Management Agency which said Boeing may miss that date by seven months.

A revised schedule for the program included in the Pentagon's annual weapons report foresees a six-month delay in combat testing of the new aircraft to April 2017, and a six-month delay in the full-rate production decision to March 2018.

The report also said Israel had requested pricing for four, six or eight KC-46A tankers in September, and the Air Force responded to the request in December.

(Reporting by Andrea Shalal; Editing by Cynthia Osterman)