New England's defense industry is moving aggressively to diversify their product lines and expand into international markets, according to a survey of 355 regional contractors released this week by the Bank of Boston. Despite a federal defense budget declining in real terms during the late 1980s, and even sharper declines seen in coming years, the firms expressed optimism about weathering the transition.

Only 20 percent of the firms said their prospects in nondefense markets were unfavorable for the next three years.

Asked about the potential impact of a 50 percent drop in defense business, less than one-third of the firms predicted red ink, though many said profits would be sharply lower. Military contracts presently make up an average of 40 percent of sales for the responding firms.

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