CORRECTED - (OFFICIAL)-UPDATE 4-US court rejects FCC decency limit

(Corrects 7th paragraph quote to reflect revised statement by FCC chairman, using word "restrict" instead of "prohibit") (Note strong language in paragraphs 4, 6. Adds FCC chairman statement, background)

By Martha Graybow

NEW YORK, June 4 (Reuters) - A U.S. appeals court on Monday overruled federal regulators who decided that expletives uttered on broadcast television violated decency standards, a major victory for TV networks.

The U.S. Court of Appeals for the Second Circuit in New York, in a divided decision, said that the U.S. Federal Communications Commission was "arbitrary and capricious" in setting a new standard for defining indecency.

The court sent the matter back to the commission for further proceedings to clarify its indecency policy. The FCC, which said it was still studying the opinion, could decide to ask the U.S. Supreme Court to reverse the appeals court.

The FCC ruled in March 2006 ruling that News Corp.'s (NWSa.N: Quote, Profile, Research) Fox television network had violated decency rules when singer Cher blurted "fuck" during the 2002 Billboard Music Awards broadcast and actress Nicole Richie used a variation of that word and "shit" during the 2003 awards.

No fines were imposed but Fox had challenged the decision to the appeals court, arguing that the government's decency standard was unclear, violated free speech protections and that the rulings had contradicted findings in past cases.

Republican FCC Chairman Kevin Martin angrily retorted that he found it "hard to believe that the New York court would tell American families that 'shit' and 'fuck' are fine to say on broadcast television during the hours when children are most likely to be in the audience."

"If we can't restrict the use (of the two obscenities) during prime time, Hollywood will be able to say anything they want, whenever they want," Martin said in a statement.