UPDATE 3-State Street settlement OK'd over bank's objection

* Judge gives preliminary OK for $90 mln accord

* State Street in talks with SEC over Wells notice

* Litigation over mortgage losses, misleading investors

* State Street shares up 2.3 pct (Recasts; adds updated shares, comments)

By Jonathan Stempel

NEW YORK, Oct 29 (Reuters) - A federal judge ordered State Street Corp (STT.N) to pay $89.75 million to settle a lawsuit over mortgage losses, rejecting the bank's argument that the accord may prove unfair depending on how a related regulatory probe is resolved.

U.S. District Judge Richard Holwell in Manhattan granted preliminary approval of the class-action settlement with a group of employee benefit plans late on Wednesday.

The accord resolves allegations that the plans lost more than $150 million in the third quarter of 2007 because Boston-based State Street misled them about its investments in risky securities, including mortgages.

The case is unusual in that State Street had agreed to resolve the case, only to then seek to put the accord on hold while it tried to settle a related probe, including threatened civil charges, by the U.S. Securities and Exchange Commission.

State Street did not return several calls seeking a comment. A lawyer for the plaintiffs did not return a call for a comment. SEC spokesman John Heine declined to comment.

In 2007, State Street had set up a $625 million legal reserve to cover investor claims after mortgage securities that the company bought lost value when credit markets tightened.

Holwell said State Street signed a "binding term sheet" for the class-action accord on June 26, the day after the SEC issued a "Wells notice" over the bank's mortgage investments.

A Wells notice indicates that SEC staff may pursue civil charges, and gives the recipient a chance to mount a defense.

According to Holwell, State Street said it had been in settlement talks with the SEC since late July, making it impossible to determine whether the class-action accord is "fair, reasonable and adequate."

The judge nevertheless rejected State Street's suggestion that a potential SEC settlement could be even larger, perhaps involving a "fair fund" to compensate investors.

"There is no such certainty as to if, when, and under what terms the SEC fair fund will be established," he wrote.

Holwell said the class-action accord otherwise appeared "manifestly" fair, given that it covers 58 percent of estimated losses and follows "intensely adversarial" negotiations. He set a Feb. 17 hearing to consider final approval.

Shares of State Street rose 98 cents, or 2.3 percent, to $43.56 in afternoon trading on the New York Stock Exchange.

The case is In re State Street Bank and Trust Co ERISA Litigation, U.S. District Court, Southern District of New York, No. 07-8488. (Reporting by Jonathan Stempel; editing by John Wallace, Lisa Von Ahn and Tim Dobbyn)