* Top court annuls government gas price caps
* Says government must obey own rules, set new tariffs
* Ruling is step towards ending French gas price distortion
* Government says price catch-up to be smoothed out over 18 months (Adds government comment, other gas vendors, background)
PARIS, Jan 30 France's highest administrative court annulled government-imposed limits on 2011 and 2012 gas price increases for consumers, paving the way for normalisation of a market distorted by years of state curbs.
French gas utility GDF Suez and its sector peers had challenged the caps in court, arguing that the rises did not cover their gas supply costs.
The ruling on Wednesday by the state council, along with a new gas pricing system, could restore market principles to the French consumer gas sector.
The council also ordered the government to come up with new tariffs within a month.
The government late last year announced a new gas pricing system that will come into force this year and will more closely reflect market prices, adjusting gas prices on a monthly basis and relying less on the price of oil.
The state council ruled that a June 27, 2011 decree had fixed gas price increases at 3.2 percent while they should have risen 7.1 percent for the third quarter of 2011, based on the government's own method of calculation.
A second decree, on July 18, 2012, capped the Aug. 1, 2012 gas price increase at 2 percent, while prices should have risen 4.1 percent. A third decree dated Sept. 26, 2012 capped the Oct. 1, 2012 price rise at 2 percent when it should have been 6.1 percent.
The ruling had been widely expected and follows a similar decision in July 2012.
"The ministers concerned should make sure that gas prices are set so that they cover the average cost of gas supply, as determined by law," the council said.
A spokesman for Environment and Energy Minister Delphine Batho said the under-charging would be balanced by a catch-up payment of 23 euros from families heating with gas, spread out over 18 months, or 1.3 euros per month.
"The government will make sure that the gas companies limit the impact of this catch-up by smoothing it out as much as possible over time," Batho said in a statement.
GDF Suez CEO Gerard Mestrallet told reporters his firm would recoup 151 million euros ($205 million) from the price catch-up.
In December, he said the gas price caps over 2012 had had a 185 million euro negative impact on the firm's gross profit (EBITDA), with a 165 million euro impact on the fourth quarter alone, due to the cold weather.
GDF Suez shares rose as much as 0.75 percent after the state council announcement but lost those gains quickly and closed 1.1 percent lower, underperforming the CAC 40 index which lost 0.5 percent.
Since Jan. 1, France has put in place a system that fixes gas tariffs on a monthly basis, replacing quarterly adjustments and reducing the impact of oil price changes on the gas price.
Under the new price calculation formula, spot gas prices will determine 36 percent of the consumer gas price, from 26 percent previously.
GDF Suez, 36 percent government owned, now every month proposes a price change based on its supply costs to the country's energy regulator (CRE).
Although France fully opened up its energy market to competition in 2007, in line with EU directives, most consumers still subscribe to France's state tariffs, delivered by former gas monopoly GDF Suez.
GDF Suez competitors such as Poweo Direct Energie and Italy's Eni, say the government's efforts to limit gas price increases in France distort competition, preventing consumers from switching to their cheaper offers.
Late last year Anode, the French gas marketing association that groups alternative gas suppliers, threatened to take its complaints about the pricing system to the European Commission. (Reporting by Geert De Clercq, Michel Rose and Benjamin Mallet; Writing by Geert De Clercq; Editing by Anthony Barker)