By David Shepardson

WASHINGTON (Reuters) - Detroit Diesel Corp, a unit of automaker Daimler AG, will spend $14.5 million to reduce pollutants and pay a $14 million civil penalty to settle alleged violations of the U.S. Clean Air Act, the Justice Department said on Thursday.

The settlement is the latest penalty imposed by U.S. regulators on auto and engine manufacturers for failing to meet emissions regulations.

The U.S. government alleged that Detroit Diesel violated the Clean Air Act by selling nearly 7,800 heavy-duty diesel engines in 2010 without properly certifying they complied with emissions standards.

Detroit Diesel said it started building 7,800 engines in 2009 but did not complete them until 2010, when tougher emissions rules were in place - a move it thought was legal. To complete the engines in 2009, Detroit Diesel said it would have been forced to add workers, then lay them off "and run a skeleton shift for the first half of 2010."

"To avoid litigation and stay focused on producing the most efficient engines in the market, Detroit has decided to settle with the EPA,” said Brian Burton, Detroit Diesel's general counsel in a statement.

Under the settlement, Detroit Diesel does not have to recall the 7,800 engines.

Detroit Diesel will offer $14.5 million in incentives to replace older polluting school buses with school buses with a 2013 or newer diesel engine and replace or re-power high-polluting switch locomotives.

The Environmental Protection Agency has stepped up efforts to ensure compliance with emissions rules after Volkswagen AG <VOWG_p.DE> admitted to installing illegal defeat devices in nearly 500,000 U.S. cars that allowed them to emit up to 40 times the legally allowable pollution in on-road driving.

In May, Daimler said it hired auditor Deloitte Touche Tohmatsu to help with an internal investigation into its diesel-engine emissions technology requested by the Justice Department, the company said.

In June, VW agreed to buy back 475,0000 U.S. vehicles equipped with 2.0 liter engines at a cost of up to $10.03 billion or offer fixes if regulators approve.

VW also agreed to spend up to $5.3 billion to address claims by federal regulators and 44 U.S. states.

VW will offer up to $2.7 billion over three years to offset excess diesel emissions, allowing government and tribal agencies to replace old buses and fund other efforts to reduce diesel emissions.

Over the last year, the EPA has scrutinized other diesel engines and in some instances has taken longer than usual to approve new diesel engines.

(Reporting by Timothy Ahmann and David Shepardson; Editing by David Alexander, Chris Reese and Bernard Orr)