Lenders to Philly papers seek to block auction

* Lenders may go to U.S. Supreme Court

* Ruling could set precedent for bankrupt companies

WILMINGTON, Del., April 7 (Reuters) - Lenders to the Philadelphia Inquirer and Daily News publisher asked a U.S. appeals court to block a bankruptcy court auction of the company's business until the courts settle a dispute over whether bids must be in cash.

The group of secured lenders asked the Court of Appeals for the Third Circuit to grant a stay of the auction, which the publisher wants to hold by the end of this month, until 10 days after the court resolves the dispute, according to documents.

The lenders said that would give them time to seek a stay in the U.S. Supreme Court if the appeals court denies their request to rehear the dispute over "credit bidding," according to court documents filed on Tuesday.

Three judges from the appeals court ruled the publisher could prevent lenders, which are owed more than $300 million, from bidding what they are owed in the auction.

The ruling was a victory for real estate developer Bruce Toll, who is leading a group of Philadelphia-area investors who offered $67 million in August to bring Philadelphia Newspapers out of bankruptcy.

The company has argued the bids must be in cash to determine the market price of the business.

The ruling has potential to set a precedent by strengthening the hand of management of bankrupt companies, giving them added clout in dealing with secured lenders.

The bankruptcy case is In re Philadelphia Newspapers LLC, U.S. Bankruptcy Court, Eastern District of Pennsylvania, No. 09-11204.

The Appeals Court case is In re Philadelphia Newspapers LLC, U.S. Court of Appeals for the Third Circuit, No. 09-4266. (Reporting by Tom Hals; Editing by Lisa Von Ahn)