http://nz.biz.yahoo.com//080730/26/71yh.html

(Adds regulator comment, details, background)

WELLINGTON, July 31 (Reuters) - A New Zealand court has backed the competition regulator and barred rival grocery firms from bidding for the country's biggest retailer, The Warehouse Group Ltd (NZX: WHS.nz) , according to a judgement released on Thursday.

The Court of Appeal overturned a lower court decision and ruled that Australia's Woolworths Ltd (ASX: WOW.ax) and local co-operative Foodstuffs cannot bid for The Warehouse, in a deal that could be worth more than NZ$2 billion ($1.5 billion).

In its ruling, the Court of Appeal set aside earlier clearances granted by the High Court, and ordered the two supermarket chains to pay costs to the regulator.

The Commerce Commission said the decision was a victory for consumers and competition.

"New Zealand consumers know that more competition is needed in the supermarket sector," said the Commission's chair Paula Rebstock in a statement.

"The Commission considered that the presence of an innovative third party, such as The Warehouse, had the potential to increase the level of competition in this important market."

Shares in The Warehouse closed on Wednesday at NZ$3.82, and have lost 33 percent so far this year, compared to a 18.7 percent fall in the benchmark top-50 .NZ50 index.

The Commerce Commission initially declined applications to buy The Warehouse last June, saying that if either chain bought the discount retailer, it would result in a substantial lessening of competition.

However, the two grocery giants appealed and last November, the High Court found in favour of the supermarkets, so the regulator took the case to the Court of Appeal.

The Court of Appeal said it would release the reasons for its decision, once it had decided what commercial information submitted by the supermarkets should remain confidential.

Woolworths was reported by media to have approached the Warehouse board with a NZ$7.15 offer, and was seen as winning any takeover battle because of it had greater financial clout.

The Warehouse sells a broad range of general merchandise in its 85 "Red Shed" stores. It is about 50 percent-owned by founder Stephen Tindall and interests close to him, while Woolworths and Foodstuffs each own about 10 percent.

The Warehouse has said it expects a profit for the year to the end of July of NZ$84-88 million, up to 27 percent lower than last year, on a sharp fall in consumer spending.

It competes against Briscoe Group Ltd (NZX: BGR.nz) , KMart (ASX: WES.ax) and the privately owned Farmers department store as well as smaller specialty retailers. ($1=NZ$1.36) (Reporting by Adrian Bathgate)