UPDATE 1-Ecuador's Correa wins new legal round against media
* Correa says media trying to undermine his government
* Rights groups say freedom of expression under threat (Recasts, adds fresh comments from Correa)
QUITO, Feb 16 (Reuters) - Ecuador's top court on Thursday upheld a jail sentence against three newspaper publishers who were also ordered to pay hefty damages for libelling leftist President Rafael Correa, in a ruling described by media advocates as a blow to democracy.
The combative Correa has been sparring with local media ever since he took office in 2007 promising a strong government to better redistribute wealth in the South American OPEC member.
He often accuses privately owned television networks and newspapers of spreading lies to undermine his government and has called them "the real opposition," while news organizations say Correa is trying to censor critics.
"This will lead to real freedom of expression, to real democracy," Correa said during a meeting with foreign reporters on Thursday. He said it will "put an end to one of the worst things in America: the abuses of the corrupt media, and the lies that they constantly say."
The original ruling last year sentenced columnist Emilio Palacio and three publishers at El Universo to three years in prison and set payment of $40 million in damages to Correa over a column criticizing the way he handled a police revolt in 2010.
None of the four have been jailed while appeals proceed.
Palacio's February 2011 opinion column titled "No To Lies" referred to Correa as "the Dictator" and alleged he had ordered troops to open fire "without warning on a hospital full of civilians and innocent people."
Thursday's ruling by the Supreme Court was issued shortly after midnight, and it applied only to the sentence against the newspaper directors. It was the first high-profile sentence issued by the newly appointed court, which was selected amid complaints from opposition lawmakers that some of the chosen judges had ties with Correa's party.
El Universo reported on Thursday that Panama has granted asylum to one of the three publishers, who was reported to be in the Panamanian Embassy in Quito. Palacio also filed for asylum in the United States, claiming he is the victim of political prosecution.
Correa, 48, attended the hearing, which lasted over 14 hours, while outside the courthouse his supporters ripped up copies of El Universo, and his critics held banners that read "Say no to dictatorship."
El Universo's lawyers have argued the original sentence was out of proportion and accused Correa of pressuring judges to get a favorable ruling.
"It's obvious that the president has a very clear goal, to finish with independent media, not only in Ecuador, but he also wants this to reverberate all over America," Joffre Campana, a lawyer for El Universo, told reporters.
The ruling drew strong criticism from rights groups, which have slammed Correa's hard stance against the media for months.
"This shortsighted ruling will only keep Ecuadorean journalists from investigating powerful politicians; it represents a serious setback for democracy in Ecuador," the U.S.-based Committee to Protect Journalists said in a statement.
A civil court judge last week sentenced two journalists to pay $1 million each for libeling Correa in a book that alleged that he was aware his older brother, Fabricio Correa, was illegally awarded public contracts.
Correa is very popular thanks to high government spending on roads, hospitals and schools. His government has not faced the kind of widespread social protests that forced three presidents to step down in the decade before he took office.
But he has come under fire for undermining Congress and the judiciary to concentrate his power, as well as for his constant attacks against the media and hardball governing style.
He still has not said if he plans to run for another term in an election scheduled for January 2013. (Additional reporting by Jose Llangari, Alexandra Valencia, Editing by Andrew Cawthorne and Todd Eastham)