RPT-UPDATE 1-US judge dismisses ADS lawsuit against Blackstone

(Repeats to remove hold from slugline) (Adds quotes from opinion, paragraphs 5-7; Blackstone statement, paragraph 8)

By Megan Davies

NEW YORK, Jan 15 (Reuters) - A U.S. judge on Thursday dismissed Alliance Data Systems Corp's (ADS.N) lawsuit against private equity firm Blackstone Group (BX.N) relating to an aborted deal to buy the credit card processor.

Blackstone agreed to a $6.76 billion deal to buy Alliance Data (ADS) in May 2007, but the deal collapsed in April 2008.

ADS sued Blackstone to win a $170 million business interruption payment, claiming the buyout firm breached its contractual obligations by prolonging negotiations with regulators and causing the deal not to be completed.

The regulator involved was the U.S. Office of the Comptroller of the Currency (OCC).

Delaware Vice Chancellor Leo Strine, in his opinion dismissing the claim, said that under the deal the two companies signed, Blackstone agreed not to thwart the purchase by taking action to impede its closing.

"ADS seizes upon this promise and tortures its plain meaning by arguing that Blackstone's failure to assent to the OCC's demands amounted to an action that impaired the consummation of the merger," he wrote.

"In other words, ADS seeks to turn a negative covenant with an accepted commercial meaning into a wide-ranging promise to take affirmative action necessary to obtain regulatory approval," he added.

A Blackstone spokesman said in a statement: "We have consistently maintained that it was not in the interests of our limited partners to complete this transaction under the onerous conditions the OCC was demanding. We are gratified that the judge shared our view of the circumstances." Limited partners are the powerful investors in private equity funds such as pension and endowment funds.

ADS said it was "surprised and disappointed" by the decision.

"Because we believe that we have a meritorious case, we will be reviewing our legal options," it said in a statement. "While our business continues to perform well and this litigation is not central to our business strategy or performance, Blackstone should be required to pay the break-up fee included in our merger contract."

Shares of ADS closed 16 cents lower at $42.27 and Blackstone's shares closed at $5.34, down 33 cents, on the New York Stock Exchange. (Reporting by Megan Davies and Paritosh Bansal; Editing by Phil Berlowitz, Gary Hill, Leslie Gevirtz)