UPDATE 3-U.S. judge rejects both bids for NHL's Coyotes

* Judge says Balsillie bid doesn't adequately protect NHL

* Throws out NHL bid "without prejudice"

* Court is "passing the puck to the NHL"

(Adds name of NHL Deputy Commissioner, background in paragraphs 10, 11)

By Phil Wahba and Ben Klayman

NEW YORK/CHICAGO, Sept 30 (Reuters) - A U.S. federal judge has rejected bids by both the National Hockey League and Canadian billionaire James Balsillie for the bankrupt Phoenix Coyotes, but upheld the NHL's right to choose who owns its teams and where they play in a victory for the professional league.

Judge Redfield Baum of U.S. Bankruptcy Court in Phoenix left the door open for the NHL to resubmit a bid but turned down Balsillie, saying in a written decision on Wednesday that his bid did not adequately protect the NHL's right to select its members and the location of the league's teams.

There were no other bids outstanding for the team.

Baum rejected the NHL bid without prejudice, meaning it could resubmit its bid.

"In hockey parlance, the court is passing the puck to the NHL, who can decide to take another shot at the sale net or it can pass off the puck," Baum wrote in his 28-page ruling.

The decision effectively ended Balsillie's attempt to force the sale and relocation of the money-losing Coyotes over the NHL's wishes.

Balsillie, co-CEO of BlackBerry maker Research in Motion, (RIM.TO), had offered $212.5 million for the franchise when it filed for bankruptcy in May, on the condition he be able to move the team to Hamilton, Ontario. He later increased the bid to $242.5 million.

Baum also faulted the NHL's bid because it would allow the league to choose which creditors would be paid in full, but said the flaws in the NHL bid could "easily be cured."

Its bid calls for all creditors to be paid in full except for Coyotes owner Jerry Moyes and former coach Wayne Gretzky, the NHL's all-time leading scorer.

Last week, Gretzky stepped down as coach of the Coyotes because of the questions surrounding the team's ownership.

"We are reviewing the opinion and considering how we can best address the Court's concerns regarding our offer to purchase the Coyotes," NHL Deputy Commissioner Bill Daly said in a statement.

Balsillie said in a statement he would not appeal the court's decision.

"All I wanted was a fair chance to bring a seventh NHL team to Canada, to serve the best unserved hockey fans in the world. I believe I got that chance," Balsillie said.

The NHL has been assuming the team's losses since it filed for bankruptcy protection.

The NHL had accused Balsillie and Moyes of seeking to use the bankruptcy process to circumvent its rules regarding team ownership and relocation. In July, the league's board of governors rejected Balsillie as a potential owner.

"The debtor is understandably disappointed in the ruling as it leaves $100 million on the table," said Thomas Salerno, a lawyer representing Moyes, adding that they were waiting to see whether the NHL will amend its offer. He was referring to the difference in the dollar amounts of both bids.

"The NHL may have practically gotten what they were looking for - they seem to be in charge," said Robert Boland, a professor of sports management at New York University.

The NHL placed its own $140 million offer in August in an effort to remove the team from the oversight of the bankruptcy court and then resell it.

The Coyotes have never made money since moving to the Phoenix area from Winnipeg, Manitoba in 1996 and lost $67.1 million in the 2008-09 season.

Earlier bidders included a group led by Jerry Reinsdorf, owner of the Chicago White Sox and Chicago Bulls teams, and Ice Edge Holdings LLC, a group of Canadian and U.S. businessmen that had previously offered up to $150 million.

The case is in Re: Dewey Ranch Hockey LLC, U.S. Bankruptcy Court, District of Arizona, No. 09-09488. (Additional reporting by Emily Chasan; Editing by Marguerita Choy)