ALBANY, N.Y., Oct. 18 (Reuters) - In a decision that could have implications for Native American tribes nationwide, the U.S. Supreme Court on Monday declined to hear an appeal by the Oneida Indian Nation seeking compensation for 250,000 acres of former tribal lands illegally purchased by New York in the 18th and 19th centuries.

The suit, first filed in 1974, alleged New York violated federal law when it purchased the land without Congressional approval. The suit claims the land, bought in central New York between 1795 and 1846, is now worth more than $500 million.

The U.S. Court of Appeals for the Second Circuit tossed out the case last August, ruling that while the purchase of the land was illegal, granting the nation's claims would be too disruptive to the state, local governments and the current owners of the land in question.

"This is pretty much a death knell for other New York tribes' land claims," said Matthew Fletcher, a professor at Michigan State University Law School who filed an amicus brief on behalf of the Oneida nation.

In its ruling, the Second Circuit invoked so-called equitable defenses, which may be used in unusual circumstances where the court believes that it would be unconscionable for a party to assert its rights. The success of such defenses by the government in tribal land claims was rare until a landmark 2005 Supreme Court case, City of Sherrill v. Oneida Indian Nation, in which the Court ruled the nation could not extend its immunity from taxation to lands that it repurchased only recently.

"The (equitable) defense is properly applied to bar any ancient land claims that are disruptive of significant and justified societal expectations that have arisen as a result of a lapse of time during which the plaintiffs did not seek relief," the Court wrote in Sherrill.

TWO JUSTICES DISSENT

In the current case, the Second Circuit relied on Sherrill in holding that the amount of time that had passed since the land was purchased -- and the number of owners in the intervening years -- could prevent the state from preparing an adequate defense.

Because the Oneidas' claim was brought under a 1790 federal law, the ruling directly affects only tribes in states that existed at that time. But several experts said the decision lends legitimacy to the use of equitable defenses by the government in tribal land claims generally.

"Since Sherrill, there has been a lot of questioning of how to apply these defenses to other Indian land claims. This decision gives equitable defenses yet another layer of validity under the law," said Sarah Krakoff, a professor at Colorado University Law School and the former director of its American Indian Law Clinic.

Seth Waxman, the attorney for the Oneida Nation, said the Second Circuit was "grievously wrong" in applying equitable defenses and "overread" the Sherrill decision.

"The Supreme Court held that damage claims for unlawful misappropriation were not impacted at all by Sherrill, and I think that's what the Court would have held" in this case, Waxman said, referring to a part of the Sherrill decision that said tribes could still seek damages, despite the validity of the equitable defenses.

He also noted that Justice Sonia Sotomayor, who concurred with the Sherrill decision when she was on the Second Circuit, took the unusual step of dissenting from the Court's decision not to hear the case, for which it gave no explanation. Justice Ruth Bader Ginsburg also indicated she would have heard the case.

POSSIBLE CLAIMS AGAINST FEDERAL GOVERNMENT

In a statement, the Oneida nation said the Court's rejection of the case would not affect its litigation strategy moving forward, and that it would continue its practice of repurchasing former tribal lands and placing them in a trust.

"The Oneida Nation will continue the course of transferring its lands into trust while remaining open to discussing a resolution with any party that wishes to participate," Oneida spokesman Mark Emery said in a statement.

Tribes may yet benefit from the ruling, Matthew Fletcher said, because it could open the door to claims against the federal government for failing to prosecute states for the illegal land purchases.

"If the statute of limitations expires, the U.S. is potentially liable because they never enforced the statutes," Fletcher said.

A Justice Department spokeswoman did not return a request for comment.

The New York Attorney General's office declined to comment on Monday's decision.

The case is Oneida Indian Nation v. New York, et al, United States Supreme Court No. 10-1420.

For New York: Assistant Solicitor General Denise Hartman.

For Oneida Indian Nation: Seth Waxman of Wilmer-Hale in Washington, D.C.

(Reporting by Dan Wiessner)

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(An earlier version of this story identified Matthew Fletcher's affiliation as the University of Michigan Law School. He is at Michigan State University Law School.)