HOUSTON, Jan 19 (Reuters) - Entergy's Vermont Yankee nuclear power plant can operate for another two decades, a federal judge ruled on Thursday, thwarting the state's effort to shut the plant in a decision that offers a measure of support for the U.S. nuclear industry.

Vermont Governor Peter Shumlin wanted the 620-megawatt plant to shut by March 21, 2012, when its original 40-year operating license was to expire, on safety concerns.

New Orleans-based Entergy, the No. 2 U.S. nuclear power operator, sought to keep the plant running another 20 years under a new federal license. The company sued Vermont in federal court in April 2011 to block the state from shutting the facility.

U.S. District Judge J. Garvan Murtha of the District Court for Vermont in Brattleboro wrote that Entergy "would be irreparably harmed by Vermont Yankee's closure" if Vermont enforced a state law that gives it preemptive authority to close the plant.

The legal battle was principally a struggle between state and federal regulatory rights more than a litmus test on U.S. atomic power. But it was still keenly watched by the U.S. nuclear industry, which has struggled to emerge from the cloud of the Fukushima disaster in Japan even as cheap natural gas erodes it cost advantage.

Vermont has reserved the right to appeal the decision, which could end up before the U.S. Supreme Court.

"It looks like the company has won some points with the federal court, but it's not clear if the war the state has waged with Entergy is over," said analyst Paul Patterson of Glenrock Associates in New York.

Gov. Shumlin said he was "very disappointed" in the ruling. Vermont is the only U.S. state that reserves the right to trump U.S. regulators in deciding whether nuclear plant permits can be extended.

"Entergy has not been a trustworthy partner with the state of Vermont," Shumlin said in a statement. "It is in Vermont's best interest to retire the plant."

In a statement, Entergy said the ruling was "good news for our 600 employees, the environment and New England residents."

Despite the judge's ruling, both sides have said they expect an appeal, which should tie up the future of the plant in court for years.

The 39-year-old plant has come under fierce resistance from state officials and environmental groups after a radioactive leak was discovered in 2010.

Vermont Senator Bernie Sanders said the ruling was "wrong on the merits and ripe for appeal."

"I believe the law is very clear, and that states have the right to reject nuclear power for economic and other non-safety reasons," Sanders said in a release.

Shumlin said he would wait for Vermont's attorney general to review the 100-page ruling before commenting on whether the state will appeal.

The importance of the court decision stems well beyond Vermont's borders. New York politicians have been keeping a close eye on the Vermont Yankee lawsuit since New York's governor wants to shut Entergy's Indian Point nuclear power plant near New York City.

Entergy bought Vermont Yankee from several New England utilities in 2002 for $180 million. The company agreed to seek a certificate of public good from the Vermont Public Service Board if it decided to run the plant beyond March 2012.

Entergy filed with the U.S. Nuclear Regulatory Commission (NRC) for a new 20-year license for Vermont Yankee in 2006 which was granted in 2011, allowing the plant to run until 2032.

But in January 2010, Entergy identified a radioactive tritium leak at the plant and company officials made contradictory statements about underground pipes related to that leak.

After the discovery of the leak, the state Senate, then headed by Shumlin, voted to block the Vermont Public Service Board from issuing a certificate that would allow the plant to run beyond 2012.

The case is Entergy Nuclear Vermont Yankee, LLC et al v. Shumlin et al, U.S. District Court, Vermont, no. 1:11-cv-00099-jgm.

For Entergy: Faith Gay of Quinn Emanuel Urquhart & Sullivan

For Shumlin: Scot Kline of Vermont Office of the Attorney General (Reporting by Eileen O'Grady and Scott DiSavino)

Follow us on Twitter: @ReutersLegal