Boeing said it would continue building the carbon-composite 787, but deliveries were on hold until the U.S. Federal Aviation Administration approved and implemented a plan to ensure the safety of potentially flammable lithium-ion batteries that prompted a widespread grounding of the new airplane this week.

In Washington, the top U.S. transportation official, Ray LaHood, said the 787 would not fly until regulators were "1,000 percent sure" it was safe. A week earlier, LaHood said he would not hesitate to travel on a Dreamliner.

Officials from the Federal Aviation Administration FAA.L, U.S. National Transportation Safety Board NTSB.L and Boeing joined Japanese authorities looking into what caused warning lights to go off this week on an All Nippon Airways Co (9202.T) domestic flight, prompting the aircraft to make an emergency landing at Takamatsu airport in western Japan.

The incident prompted regulators in the United States and around the world to ground the 50 Dreamliners in service.

The jet has been flying safely for 15 months, carrying more than 1 million passengers, but it has run into problems in recent weeks, including problems with fuel leaks.

The biggest safety concerns centred on its lithium-ion batteries, which are lighter than conventional batteries, pack more energy and are faster to recharge, but are also potentially flammable.

When the FAA announced the grounding of all six U.S.-operated 787s on Wednesday, the agency said airlines would have to show the batteries were safe and in compliance with its rules. It said both battery failures released flammable chemicals, heat damage and smoke - all of which could damage critical systems on the plane and spark a fire in the electrical compartment.

A Japanese safety official at Takamatsu airport told reporters that excessive electricity may have overheated the battery and caused liquid to spill out. Pictures released by investigators of the battery showed a burnt-out blue metal box with clear signs of liquid seepage.

GS Yuasa Corp (6674.T), the Japanese firm that makes batteries for the Dreamliner, said it sent three engineers to Takamatsu to help the investigation.

A person at the company, who asked not to be named due to the sensitivity of the issue, said: "Our company's battery has been vilified for now, but it only functions as part of a whole system. So we're trying to find out exactly where there was a problem within the system."

An official with Thales (TCFP.PA), the French company that makes control systems for the battery, referred all questions to Boeing.

At a news conference, the Japan Transport Safety Board JTSB.L said the charred battery and the systems around it would be sent to Tokyo for more checks. It said there were similarities with an earlier battery fire on a Japan Airlines Co (9201.T) 787 parked at Boston's Logan International Airport.

"This information will go to Boeing and the FAA. They will assess it" before allowing the 787 to fly again in Japan, said Hideyo Kosugi, a JTSB inspector. He said the JTSB aimed to issue a report within a week but the U.S. review might take longer.

LaHood, the U.S. transportation secretary, said Friday he could not predict when the 787 would resume flight.

"So those planes aren't flying now until we really have a chance to examine the batteries ... That seems to be where the problem is," said LaHood, who told a news conference on January 11 he would not hesitate to fly on the plane himself.

When pressed by reporters on Friday about whether he regretted his prior statements, LaHood said, "Last week it was safe." What has changed since then, he said, is the fact that another incident occurred involving the batteries.

Karen Walker, editor of Air Transport World magazine, said La Hood and FAA Administrator Michael Huerta chose to "stand side by side" with Boeing executives and underscore the plane's safety because of its huge importance to the U.S. economy as the

first all-new American airliner in two decades.

"However, the joint statements of safety confidence and lack of an (airworthiness directive) until after a second serious incident ... could potentially hurt Huerta and LaHood," she wrote.

Boeing shares fell 0.3 percent to $75.04. Since the recent spate of issues began in early December, the stock is up 1.4 percent, against a gain of 5.4 percent for the S&P 500 over the same period.

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FACTBOX - Dreamliner incidents

FACTBOX - Customer comments

FACTBOX - Batteries at fault?

NEWSMAKER-Low-profile exec in spotlight

ANALYSIS-Boeing/Japan ties still seen strong

ANALYSIS-Battery technology in focus

GRAPHIC: Dreamliner incidents r.reuters.com/xej35t

GRAPHIC: Who makes the 787 r.reuters.com/fyp35t

VIDEO: Boeing's sleepless nights reut.rs/11z9Zi1

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Shares in the Kyoto-based battery maker GS Yuasa rose as much as 3.9 percent on Friday, having dropped around 18 percent since the January 7 battery fire in the auxiliary power unit APU.L of the JAL plane at Boston.

The U.S. investigation into that incident is focused on the Japanese-made batteries, with no indication the APU - built by United Technologies Corp's (UTX.N) Pratt & Whitney - was involved, said a person familiar with the government probe, who was not authorized to speak publicly.

Mark Rosenker, a former NTSB chairman, said Boeing conducted over 1.3 million hours of testing before deciding the lithium-ion batteries were safe to use on the 787, and the company had to satisfy additional rigorous tests to be granted a "special condition" by the FAA to use the batteries.

"I don't believe there was corner cutting in any way. I believe the FAA has done a good job in its certification process. And Boeing is a very formidable and extremely careful airplane manufacturer. You don't survive in this business by not making safe, efficient and reliable planes," he said.

BIGGEST MARKET

Japan is the biggest market so far for the 787, with ANA and JAL operating 24 of the 290-seat wide-bodied planes, which have a list price of $207 million. Boeing has orders for close to 850 of the planes.

Goldman Sachs estimated the hit to ANA's annual operating profit could be up to $40 million if the grounding of its 17 Dreamliners drags on through March. The plane makes up close to a tenth of ANA's fleet and is crucial to its growth strategy.

ANA cancelled more than 60 domestic and international flights through Monday, affecting more than 10,000 passengers. JAL has cancelled 8 Dreamliner flights on its Tokyo-San Diego route until January 25. Other flights will switch to older planes.

A spokesman for the airline said ANA remained committed to the Dreamliner and would spare no effort to get it back in the air safely.

Australia's Qantas Airways (QAN.AX) said it cancelled an order for one of 15 Dreamliners earmarked for its budget arm Jetstar. It said the decision to cancel was taken late last year, before the plane's recent problems. Qantas has options to order 50 of the new generation aircraft.

Separately, Japan's transport ministry said a fuel leak on another JAL-operated 787 last week was due to a malfunction in a drive mechanism that controls a valve. It said the British company that makes the valve was investigating. The ministry declined to name the firm.

BAD BATCH?

The use of new battery technology is among the cost-saving features of the 787, which Boeing says burns 20 percent less fuel than rival jetliners using older technology.

Hans Weber, president of TECOP International Ltd, a San Diego-based aviation consulting firm and former FAA adviser, said the incidents could be linked to a bad batch of batteries.

"We have to consider the suppliers were at one time producing a lot of equipment for the 787 and then everything got delayed, so some of the stuff they built has been sitting on the shelf for a while. Some of these might have been produced early in the production process and there may have been some deficiencies in the production process," he said.

The 787, a leap in aircraft design, has been plagued by cost overruns and years of delays, though orders last year helped Boeing overtake rival Airbus (EAD.PA) as the world's largest manufacturer of passenger jets.

(Additional reporting by Yoshiyuki Osada, James Topham, Mari Saito, Issei Kato, Maggie Lu Yueyang, Herng Shinn Cheng, Ruairidh Villar, William Rigby, Alina Selyukh and Andrea Shalal-Esa; Writing by Ian Geoghegan; Editing by Jeremy Laurence, Gary Hill, Kenneth Barry and David Gregorio)

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