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UPDATE 2-Australian court says Fortescue founder didn't mislead investors

* Ruling from highest court ends seven-year battle

* Court rules no misleading statements on Chinese deals

* Ruling comes at critical time for iron ore miner

* Fortescue shares on trading halt

(Adds comments) By Maggie Lu Yueyang

CANBERRA, Oct 2 (Reuters) - Australian iron ore magnate Andrew Forrest and Fortescue Metals Group Ltd won a High Court appeal to overturn a conviction for misleading investors, allowing the billionaire to return as an executive director to the company he founded.

That in turn will bring clarity to the direction the world's No.4 iron ore miner will take as it struggles with heavy debts, ebbing demand from China and sliding iron ore prices.

"It eliminates one area of uncertainty that has dragged on for quite a while. But for Fortescue it comes down to genuine iron ore demand," said Jamie Spiteri, senior dealer, Shaw Stockbroking. "Their future profitability is dependent upon an improvement in that iron ore price."

Forrest founded Fortescue in 2003 after a decade of promoting everything from Cuban-style nickel mining to underground desert oceans. He owns just under one-third of the company, worth more than $3.5 billion at current prices.

Known by his nickname "Twiggy," Forrest is credited with turning Fortescue into the country's third-largest iron ore producer after Rio Tinto Ltd and BHP Billiton Ltd , with a current market value of around $11 billion.

But hammered by slumping iron ore prices just as it ramps up borrowings to fund a surge in production, Fortescue has come under increasing pressure in recent months. In September, the company said it would slash spending and jobs just days after reassuring on its outlook, shocking investors.

Later that month, Fortescue lined up $4.5 billion to restructure part of its $11.7 billion debt pile and said it was in talks to sell stakes in some of its assets.

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The long-running case relates to allegations of misleading investors in 2004. Forrest was convicted in February last year and faced a potential ban on being a company director if he had lost his appeal to Australia's highest court.

Forrest, who has strongly defended the case over the past seven years, stood aside as chief executive of Fortescue in July last year to focus on philanthropic work with indigenous communities.

The court case stems from information provided to the Australian Securities Exchange in August and November 2004 regarding agreements with three Chinese construction companies to build and finance Fortescue's mining project in Western Australia's Pilbara region.

The country's securities watchdog, the Australian Securities and Investment Commission (ASIC), accused Fortescue and Forrest of misleading or deceptive conduct, in breach of corporations and trade practices laws, by saying the agreements were legally binding.

The High court unanimously held that the statements made by Fortescue and Forrest regarding their agreements with Chinese investors were neither false nor misleading.

"Because the statements were neither misleading nor deceptive, the Court further found that Fortescue and Mr Forrest had not failed to meet their obligations under the Corporations Act," the court said.

The ruling will have implications for other Australian companies and their obligations under continuous disclosure rules.

Fortescue and Forrest had initially successfully defended the case against ASIC, but then lost on an appeal in the Federal Court.

Fortescue shares were placed on a trading halt ahead of the High Court decision.

The stock closed on Monday at A$3.50, having fallen some 43 percent from a recent peak above A$6 in March.

(Additional reporting by James Grubel in Canberra and Victoria Thieberger in Melbourne; Editing by Lincoln Feast, Richard Pullin and Ryan Woo)

((James.Grubel@thomsonreuters.com)(+612 6273 2730)(Reuters Messaging: james.grubel.reuters.com@reuters.net))

Keywords: AUSTRALIA FORTESCUE/