* French court will have to deliver final decision
* Investments on hold over funding legality
* European Commission says making progress with France
* Case fuels EU-wide debate on energy subsidies (Adds European Commission reaction)
By Barbara Lewis and Michel Rose
BRUSSELS/PARIS, Dec 19 Europe's highest court said on Thursday subsidies to encourage wind power in France had not been properly flagged to the European Union as state funding, prompting calls from the French wind industry for a new, more legally-sound funding system.
The case also has implications for an EU-wide debate on renewable energy subsidies, a fiercely contested political issue as governments and consumers blame them for pushing up fuel costs.
Under EU rules, government help known as state aid should be notified to the European Commission, the EU executive, which is responsible for ensuring there is no market distortion.
France's failure to follow this procedure provided a basis for a pressure group opposing onshore wind power, Vent de Colere (Wind of Anger), to challenge France's preferential tariffs for wind energy in 2011 in a French court.
The French court turned to Europe's top court for advice.
The Court of Justice of the European Union (ECJ), based in Luxembourg, found on Thursday that "the obligation to purchase the electricity generated by wind turbines falls within the concept of an intervention by the State through State resources".
It is now up to the French court, the Conseil d'Etat, to make the final judgment. It is widely expected to annul the 2008 tariff decree.
"The court's decision started a race against the clock," said Frederic Lanoe, head of French wind power lobby France Energie Eolienne.
Lanoe said the Conseil d'Etat's decision was not expected before two or three months and urged the French government and the European Commission to set-up a sustainable system in the meantime.
"The 11,000 workers of the French wind sector are holding their breath," he said.
The European Commission said later on Thursday it was in contact with French authorities over a new tariff decree notified by the government last October, which would pave the way for a new funding regime compatible with EU regulations.
"Good progress is being made in the contacts with the French authorities, which are very constructive," Commission spokesman Antoine Colombani said in a statement.
"On this basis and given the uncertainties that the ruling might create, the Commission is working towards a decision soon, probably in the first quarter of 2014."
Legal uncertainty over the tariffs, which forced EDF to buy wind-generated power at costs higher than the general market, has paralysed investment in the French wind sector since 2011.
Only 348 MW of new wind power capacity has been added in the first nine months of the year in France, 39 percent less than during the same period last year, according to official data.
France now has a total wind power capacity of about 8 GW, compared to more than 30 GW in Germany.
"The goal now is that the European Commission's approval of the new regime arrives before the Conseil d'Etat's decision to annul the old one, to give legal continuity to the sector," said Marion Lettry, wind energy specialist at the SER renewables lobby.
No one was immediately available for comment at the Conseil d'Etat.
Supporters of renewable energy are concerned about wider uncertainty over the future of green subsidies.
The European Commission on Wednesday said it was investigating Germany's management of renewable subsidies. It also began consultation on new guidelines aimed at ironing out any market distortions caused by government funding of green energy.
Lawyers said the French case could have implications for the German case.
"The Commission will likely take this, the French case, as additional support for its action against Germany and put pressure on our government to conform with notification and reporting obligations," Frankfurt-based lawyer Jochen Terpitz of international law practice Simmons & Simmons said. (Additional reporting by Vera Eckert in Frankfurt; Editing by Dale Hudson, William Hardy and David Evans)