By Jim Wolf

WASHINGTON (Reuters) - Lockheed Martin Corp <LMT.N> won a potential $3.6 billion contract to start building a new generation of global positioning satellites that will boost accuracy for worldwide users, the Air Force said Thursday.

Lockheed, the Pentagon's No. 1 supplier by sales, beat Boeing Co <BA.N>, the No. 2 supplier, to supply the first batch of satellites in the new Global Positioning System, known as GPS III.

GPS satellites, in one of six Earth orbits, circle the globe every 12 hours beaming precision navigation and timing signals. They are used for everything from mapping to business transaction authentication to precision weapons.

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The system is operated by the Air Force Space Command for the U.S. Defense Department, which makes the signal available worldwide for free.

The first of the new GPS III satellites is scheduled for launch in early 2014, Col. Dave Madden, head of the Space Command's Global Positioning System wing, said in a teleconference. Ultimately, the new network is due to include 32 satellites.

Lockheed's initial contact was for two "research and development" craft valued at $1.46 billion, the Air Force said. If the government exercises its options to buy 10 more, the deal would be worth roughly $3.6 billion, Madden said.

The Air Force plans to stick with Lockheed as the supplier of future GPS III satellites but retains the option to hold a new competition for two follow-on batches, he said.

GPS III satellites will feature greater signal power than previous configurations, boosting resistance to jamming, perceived as a growing threat.

The new network will incorporate a civil signal compatible with the European Union's planned Galileo system as well as a military signal called the M-code for the stepped-up anti-jamming capability.

Eventually, the constellation will be cross-linked, meaning it can recalibrate itself through updates from a single ground station instead of waiting for each satellite to pass in view of a ground antenna.

The current network is said to be accurate enough to pinpoint a user's location anywhere on earth within about nine feet. This will improve to about three feet as new satellites replace the old ones.

After 18 of the new GPS III satellites are in operation in 2019 or so, accuracy could be as sharp as nine inches, depending on the quality of the receiver, said Col. Mark Crews, the system's chief engineer.

Lockheed's chief subcontractors on GPS III are ITT <ITT.N> and General Dynamics Corp <GD.N>.

(Reporting by Jim Wolf; Editing by Tim Dobbyn, Gary Hill)