* Court says three dismissed workers must be reinstated
* Latest twist in long-running battle between Fiat and union
* Could complicate co's efforts to enforce labour contracts
ROME, Feb 23 (Reuters) - An Italian appeals court ruled against Fiat SpA on Thursday over the dismissal of three employees, ordering the carmaker to reinstate them and dealing a blow to its efforts to take on entrenched work practices at its domestic plants.
The ruling was the latest twist in a long-running labour dispute between Fiat and the country's biggest metalworkers' union, Fiom, which is opposing more flexible labour contracts introduced by Fiat at the factory level.
Those contracts set tougher rules for absenteeism, sick pay and working hours, in a bid to boost productivity at the company's loss-making plants on its home turf.
Fiom said the ruling countered Fiat's position that its factories were ungovernable because of the privileges enjoyed by workers under national labour deals it has now scrapped.
Fiat, whose CEO Sergio Marchionne has threatened to shift production abroad unless the labour regulation changes are fully backed by unions, said it would lodge an appeal with Italy's top court.
The Turin-based carmaker, which also runs Chrysler, dismissed the three workers at its Melfi plant in southern Italy in July 2010, accusing them of blocking machinery during a strike to prevent non-striking workers from doing their job.
A month later a court ruled the three should be reinstated, but Fiat appealed against the decision and won -- until Thursday's ruling which again went Fiom's way.
"Justice has been done in Melfi. There were no saboteurs, the factory was not unmanageable, and the argument used by Fiat to enforce new factory-level contracts on employees rather than national ones has collapsed," said Fiom's Giorgio Airaudo.
Fiat said in a statement it considered the actions of the three workers unacceptable and would continue to take initiatives to prevent them from re-occurring.
Fiom has fiercely opposed the new labour deals introduced by Fiat in January, which were backed by other unions. It has threatened to start legal proceeding against Fiat over those contracts and may feel emboldened to do so after Thursday's ruling.
Fiom has also called a strike on March 9, arguing Fiat is using the labour row as a pretext to slim down its operations in Italy.
The growing integration with Chrysler in view of a full-blown merger has shifted Fiat's centre of gravity towards the United States, particularly given the weakness of the European market. Chrysler is now contributing more than 80 percent of the group's operating profit.