A U.S. appeals court dealt the Obama administration a setback on Thursday when it refused to halt deepwater oil drilling, but analysts said they did not expect companies to begin operations soon.

The White House sought to suspend deepwater drilling of new oil wells in the area temporarily while it investigated the April 20 rig explosion that unleashed BP Plc's oil spill in the Gulf of Mexico and adopted new, stricter safety regulations.

It will also likely prompt the Interior Department to quickly issue a revised moratorium order on deepwater drilling below 500 feet to address concerns raised by the federal courts, which could set off more legal battles.

A department official said earlier on Thursday that such an order would be issued immediately to address any deficiencies, a move that could have drillers sitting on the sidelines again.

Already some oil services companies have said they would not begin new drilling operations in the region until the legal matters were resolved, and some were moving rigs and workers overseas for projects.

Tonight's decision is not conclusive. There are more battles to come, said Jim Awad, managing director at Zephyr Management. I think the Obama administration is committed to fighting it.

A White House spokesman declined to comment and a Justice Department representative was not immediately available for comment.

Effectively the government's getting what they want by default, said Dan Pickering, head of research at Tudor, Pickering, Holt & Co.

It's too risky for companies to start up the deepwater drilling process when you know the rug could be pulled out from underneath you. In practical terms, the industry is still in the same holding pattern that it has been in.

Nonetheless, the ruling could help shares of drilling companies, like Hornbeck Offshore Services Inc., and others who have seen huge sell-offs since the incident, some approaching 50 percent.

There will likely be a move higher in the space, but I don't expect a violent move higher, said Peter Kenny, managing director at Knight Capital Markets. I think most energy insiders expected the Obama administration's efforts to be stymied.

CASE TO CONTINUE ON MERITS OF MORATORIUM

U.S. District Judge Martin Feldman lifted the suspension on new deepwater drilling last month after finding it too broad and arbitrary because it failed to take into account the economic impact it would have on the industry and communities.

The Obama administration appealed and asked for a stay pending the appeal amid fears that another blowout of an oil well in the Gulf of Mexico would be catastrophic and further devastate the region.

The U.S. Court of Appeals for the Fifth Circuit, based in New Orleans, ruled against a stay about 90 minutes after hearing arguments, saying the administration failed to show how it would be irreparably harmed if the stay was not granted.

In a 2-1 decision, the court said that the administration also made no showing that there is any likelihood that drilling activities will be resumed pending appeal.

The court said that Interior Secretary Ken Salazar could renew the stay request if he can show that drilling activity by deepwater rigs has commenced or is about to commence.

Arguments on the government's appeal seeking to reinstate the original moratorium order were set for the week of August 30.

Louisiana has said that the drilling industry is worth $3 billion to its economy and that the moratorium was throwing thousands of people out of work at a time when the state was just getting back on its feet after Hurricane Katrina in 2005.

Before the ruling, Louisiana Governor Bobby Jindal, who attended the oral arguments, told reporters that the industry needed predictability so they could resume work.

They're not going to resume drilling without predictability, he said.

(Additional reporting by Chris Baltimore in Houston and Martinne Geller in New York; editing by Paul Simao)

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