NEW YORK, June 20 (Reuters) - An opinion by the New YorkCity Bar Association has blessed the practice of third-party funding for litigation, but cautioned that the practice can pose thorny ethical issues.

The practice of seeking funding for cases from outside investors has been on the rise in the past 20 years, the association said. It has moved from a cottage industry of personal-injury cases to a $1 billion business involving a wide swath of commercial litigation.

The New York City Bar is not the first to approve third-party funding, but its opinion is significant because it says "there is nothing bad about this, it has enough redeeming virtues to let the clients decide," said Louis Solomon, a litigation partner at Cadwalader Wickersham & Taft.

While the opinion does not have the force of law, it could be followed by other bar associations or used in ethics cases, said Solomon.

"The city bar association is a very renowned bar; it has all the lawyers in New York City in it, and it has a real lineage of taking important opinions on important topics," Solomon said.

The city bar association's opinion comes as the American Bar Association is also considering the topic. The ABA's project on the ethics of alternative-financing generated dozens of letters earlier this year, from plaintiffs' lawyers embracing the practice to the U.S. Chamber of Commerce's legal reform group, which opposes it.

In its June 15 opinion, the city bar association raised issues surrounding a lawyer's obligation to protect confidential information, conflicts of interest with a lawyer and funder, and the role of the outside funder in controlling a case.

"From the legal ethics perspective, perhaps the greatest concern stems from a financing company's involvement in the details of a case," the opinion said.

A lawyer shouldn't allow the outside funder to control the case without a client's consent, the opinion stated. A financing company could, for example, steer a plaintiff away from settling a case if it thinks it could recoup more, possibly contradicting the plaintiff's best interests.

Lawyers also shouldn't disclose privileged information without the consent of their clients. Third-party financing may demand privileged information in order to assess the case and determine how much to invest.

The opinion is primarily aimed at companies that provide funding to individual plaintiffs, rather than ones funding corporate entities, said Christopher Bogart, chief executive officer of Burford Capital, a publicly-traded lender which typically provides between $3 to $15 million per transaction to corporate clients.

"It's obviously useful for an organization like the New York City Bar Association to say there is value in the emergence of litigation funding, and there are ways to do it without raising ethical issues," Bogart said.

(Reporting by Carlyn Kolker)