By Valerie Insinna, Mike Stone and Pratyush Thakur

(Reuters) -Pratt & Whitney on Tuesday hit fresh turbulence over a problem-plagued engine model, prompting a 10% drop in shares of parent RTX as it said more than 1,000 engines must removed from Airbus planes and checked for microscopic cracks.

It was the latest setback to the U.S. engine maker's efforts to conquer the biggest market segment -- narrowbody jets -- and could exacerbate a capacity crunch as some airlines struggle with a plane shortage during the peak summer travel season.

RTX Corp said a "rare condition" in powdered metal meant 1,200 of more than 3,000 engines, built for the twin-engined Airbus A320neo between 2015 and 2021, have to be taken off and inspected for micro cracks that would point to fatigue.

Microscopic contaminants were found in a metal used in the engine's high-pressure turbine discs - part of the engine core.

Of the 1,200 engines, 200 must be checked by mid-September because of their time in service. The remainder will need inspection over the next year.

Engines currently in production are unaffected, the aerospace company, until recently known as Raytheon Technologies, said. Pratt made up 30% of RTX's 2022 sales.

In an interview, Chief Executive Greg Hayes acknowledged the airlines' frustration over a spate of problems with the Geared Turbofan (GTF) engines over the last seven years.

But he dismissed the prospect that airlines would switch to alternative engines from CFM International, a GE-Safran venture.

"Their patience is not unlimited. But I will tell you right now if they want to change engines, that's a draconian step and there's probably not enough capacity out there, at least in the short term," he told Reuters.

The disclosure came weeks after RTX told a Paris Airshow audience that current problems were limited essentially to supply chain issues rather than technical ones. On Tuesday, it said it began dealing with the metal problem about 10 days ago.

In a research note titled "GTF. OMG.," Vertical Research Partners analyst Robert Stallard underscored past problems in the durability and supply of engines.

"Some investors are clearly throwing in the towel on RTX. While the latest GTF issue could be the last straw for some, we suspect that the negative (share price) response is overdone".

Questions remained over the cash impact, he added.

RTX said it was reducing its 2023 cash-flow forecast by $500 million to $4.3 billion due to the inspections and in the "next couple of months" would know more about 2024 and 2025.

Airbus said there was no safety issue or impact on current deliveries. Its stock fell 2.5%.

'EXTREME ENGINEERING'

Major customers that took delivery of affected A320neo jets include Spirit Airlines Inc, JetBlue Airways and Wizz Air, according to Cirium data.

Hungary's Wizz Air said it expected first-half capacity to shrink by a "mid-single digit" percentage. But high demand could result in higher fares, leaving profitability intact, it said.

Replacing the discs requires removing the engine, disassembling and reassembling it - a process Hayes said could take 60 days.

Jet-engine manufacturers have faced years of pressure to improve fuel efficiency and emissions and are striving to achieve net-zero in 2035. "The powder issue highlights the extreme engineering developed into next-generation engines which has come with unexpected maintenance," Benchmark analysts wrote.

Pratt and to some extent other suppliers have also faced issues related to wear and tear in hot and dusty climates.

Low-cost Indian carrier Go First, which plunged into financial crisis this year, blamed "faulty" Pratt & Whitney engines for the grounding of about half its 54 Airbus A320neos. Pratt has said the dispute masks Go's own financial problems.

Announcing quarterly earnings on Tuesday, RTX increased its 2023 sales expectation from $72 billion to $73 billion to $73 billion to $74 billion.

Hayes said 2025 financial goals, which include reaching $9 billion in free cash flow, should not be affected by the problem, but there could be "potential margin impact."

(Reporting by Pratyush Thakur in Bengaluru, Valerie Insinna and Mike Stone in Washington; additional reporting by Susan Mathew in Bengaluru, Rajesh Singh in Chicago, Tim Hepher in Paris; Editing by Shounak Dasgupta, Sharon Singleton and Nick Zieminski)