UPDATE 2-US appeals court declines to reverse set-top rule

(Adds detail, comment from Comcast, byline)

By Peter Kaplan

WASHINGTON, May 16 (Reuters) - Comcast Corp (CMCSA.O: Quote, Profile, Research, Stock Buzz), the top U.S. cable operator, suffered a legal setback on Friday in its effort to reverse federal restrictions on the type of set-top box it can offer customers.

A U.S. appeals court upheld the Federal Communications Commission's refusal last year to waive a key agency rule on set-top boxes.

The rule went into effect last July and is designed to open up the market for cable TV set-top boxes.

Under the FCC rule, video providers have to stop selling or leasing integrated converter boxes that contain both the security and program navigation functions. That way, manufacturers could offer cable customers alternative converter boxes.

The U.S. Court of Appeals for the District of Columbia said the FCC's rationale for denying the waiver to Comcast was "quite reasonable."

Comcast had argued that waiving the rule would help it develop new, better digital services.

In asking the FCC for a waiver, Comcast said it wanted to continue selling entry level set-top boxes with the security function integrated, as an easier way of preparing customers for switching television delivery to a digital signal from analog in early 2009.