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By Valerie Insinna and Abhijith Ganapavaram

WASHINGTON (Reuters) -Boeing is set to meet targets to deliver at least 400 narrowbody 737s this year, its chief financial officer said on Thursday, despite a recently discovered production flaw that has slowed deliveries of its bestselling 737 MAX.

However, Boeing will be on the "low end" of its 400-450 jet target and margins for its commercial airplanes business will be negative in the third quarter due to low deliveries and higher development costs, Boeing CFO Brian West said at an investors conference.

Narrowbody deliveries, which exceeded 100 737s in the first and second quarters, will reach only about 70 jets in the third quarter after a disappointing 22 737s delivered in August, West said.

The recent supplier problem, discovered late last month, involves fastener holes on the 737 aft pressure bulkhead that were improperly drilled and therefore misaligned or elongated.

About 75% of the 220 737s in Boeing's inventory will need rework, and the fix will be time-consuming than an earlier problem involving improperly attached brackets on the 737's vertical tail, West said.

"There's hundreds of holes that get inspected, there's an X-ray inspection process step that's required, and it's a very critical part of the airplane," he said.

Spirit AeroSystems, which makes the 737 fuselage, said in August it had corrected the production issue and continues to deliver fuselages to Boeing.

Despite continued supplier defects, West said Boeing has no intention of changing its supplier master schedule, which calls for Boeing's supply chain to ramp to a monthly production rate of 50 737s by the 2025-2026 timeframe.

Margins at Boeing's defense business will remain negative in the third quarter as the company works through continued supply chain and labor issues, West said.

(Reporting by Valerie Insinna and Abhijith Ganapavaram; Editing by Mark Porter and Chizu Nomiyama)