July 10 (Reuters) - New York City cannot force tobacco retailers to display anti-smoking signs depicting a decaying tooth, diseased lungs and a damaged brain, a U.S. appeals court ruled on Tuesday.

The decision by a three-judge panel of the 2nd U.S. Circuit Court of Appeals was a loss for New York health officials who, spurred by Mayor Michael Bloomberg, have made fighting smoking a city-wide crusade.

Tobacco companies Philip Morris USA, Lorillard Tobacco Co, and R.J. Reynolds Tobacco Co, along with two major retail trade groups and two convenience stores, filed suit in June 2010, saying the signs would violate their rights. The city agreed to temporarily halt enforcement of the signs in the wake of that lawsuit.

Judges Peter Hall, Gerard Lynch and Denny Chin said that while "the City's desire to tilt the balance more in favor of educating consumers is understandable," only federal law can "require retailers to post warning signs adjacent to cigarette displays."

A lawyer for Philip Morris said in a statement that "this suit has always been about who has the authority to regulate the content of cigarette warnings."

"That is a power reserved to the federal government without interference or additional efforts by state and local authorities," said Murray Garnick, associate general counsel for the tobacco firm's parent company, the Altria Group.

The opinion affirmed a December 2010 ruling by U.S. District Judge Jed Rakoff in Manhattan. Rakoff had found that by requiring the posters to be visible at the point of sale of tobacco products, the city had overstepped its mandate because only the federal government has the right to impose such conditions on the promotion of cigarettes.

The appeals court said that the U.S. Labeling Act preempts local laws when it comes to regulating the advertising or promotion of cigarettes. The New York rule would have had the improper effect of regulating "the content of the retailers and manufacturers' promotional efforts."

In a statement, the City's Department of Health said: "today's ruling is likely to reduce the number of smokers who quit" because the signs would have been posted "at a place where smokers were most likely to see it."

'TOOTH DECAY'

The three different signs, developed by the city's Health Department, graphically depicted the harmful effects smoking can have on the body. They bore messages such as "smoking causes tooth decay" and listed the number of a city help line for assistance on how to quit.

New York City Mayor Michael Bloomberg has made fighting smoking a personal mission. In 2003, he pushed a ban on smoking in bars and restaurants that was met with protests, but has since become widely accepted. The city also has banned smoking in parks, beaches, boardwalks, pedestrian plazas and other outdoor public spaces.

The U.S. government requires tobacco companies print the "Surgeon General's Warnings" about potential health problems on all cigarette packages, ads and billboards. Federal drug regulators have approved nine images as new warning labels that featured damaged lungs, a man blowing smoke through a tracheotomy hole in his throat and a mother holding a baby with smoke in its face.

The case is 23-94th St. Grocery Corp. et al, v. New York City Board of Health et al, 2nd U.S. Circuit Court of Appeals, No. 11-91.

For the City: Drake Colley, Office of the Corporation Counsel of the City of New York.

For Philip Morris: Miguel Estrada of Gibson, Dunn & Crutcher. 

(Reporting By Basil Katz)

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