* Operation Cotton case to resume after was halted in legal aid fee row
* Appeal court tells government, legal profession to resolve impasse
* FCA, Ministry of Justice, welcome court decision (Adds fresh quotes from Ministry of Justice, lawyer comment, details)
LONDON, May 21 (Reuters) - England's Court of Appeal on Wednesday overturned a judge's decision to halt a key fraud trial and urged the government and legal profession to resolve a deadlock that has left some defendants unable to find lawyers at new legal aid rates.
Three senior judges ruled that a May 1 decision by Judge Anthony Leonard to throw out the case brought by the Financial Conduct Authority (FCA) because of a lack of trial lawyers involved "errors of law or principle and ... was not reasonable".
Dubbed Operation Cotton, it has become a test case for a string of scheduled financial crime trials as lawyers and Britain's Ministry of Justice (MoJ) squabble over sharp cuts the government says it needs to impose to one of the world's most expensive legal aid bills.
Arguing that the future of Britain's criminal justice system is at stake, lawyers have staged unprecedented walkouts that have disrupted trials across the country after a 30 percent drop in the fees they can claim for taking on so-called Very High Cost Cases (VHCC), which often run for weeks.
The Court of Appeal judges said although they could not become involved in the dispute between the legal profession and the MoJ, they were concerned about the affect on the criminal justice system and urged both sides to hammer out a deal.
"... It is of fundamental importance that the MoJ led by the Lord Chancellor (Justice Minister Chris Grayling) and the professions continue to try to resolve the impasse that presently stands in the way of the delivery of justice in the most complex of cases: this will require effort by both sides.
"The maintenance of a criminal justice system of which we can be proud depends on a sensible resolution of the issues that have arisen," they said in their judgment.
The FCA welcomed the decision and said it was pleased the case could now proceed to trial. The MoJ said it was entirely supportive of self-employed barristers, who represent defendants in court, and had made "strenuous efforts" to reach an accord.
"We have always been clear the government will take the necessary steps to ensure representation by putting in place measures to cover the (VHCC) cases," a spokesperson said.
"Legal aid is a vital part of our justice system but we must ensure it is sustainable and fair for those who need it, for those who provide legal services as part of it and for the taxpayer, who ultimately pays for it."
The FCA's case, over an alleged land-banking scam, unravelled after five defendants failed to find senior lawyers prepared to represent them in court at the new legal aid rates.
Alex Cameron, a senior lawyer and brother of Prime Minister David Cameron, had represented the defendants free of charge and argued they risked being unable to receive a fair trial if suitable trial lawyers were not found promptly.
Lawyers said the thorny problem of trial lawyers boycotting complex cases was far from resolved.
"...The problem at the heart of this significant fraud trial, and many others close behind it, remains," said Gareth Weetman, a senior lawyer at 7 Bedford Row.
"It is very likely that exactly the same lack of barristers as arose in this case will arise in the others like it over the coming months."
The FCA alleges that between 2008 and 2011, the Operation Cotton defendants were part of a scheme to buy, or pretend to buy, sites that were divided into sub-plots and then aggressively marketed to often vulnerable members of the public under a series of false pretences. (Reporting by Kirstin Ridley, editing by Jane Merriman and John Stonestreet)