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UPDATE 1-U.S. top court to review antitrust claims against American Express

(Adds background to case, paragraphs 3-12)

WASHINGTON, Oct 16 (Reuters) - The U.S. Supreme Court on Monday agreed to decide whether American Express Co is violating federal antitrust law by forbidding merchants that accept its credit cards from encouraging customers to use rival cards that charge lower fees.

The justices will hear an appeal by 11 states led by Ohio that had sued American Express of a lower court ruling last year that endorsed the legality of the company's "anti-steering" provisions in contracts with merchants.

Merchants annually pay more than $50 billion in so-called swipe fees to process credit card transactions, and these fees can be passed along to customers through higher prices.

New York-based American Express charges merchants higher fees relative to the other credit card networks, and generates more revenue, according to the states' legal papers. The company accounts for about 26 percent of all U.S. credit card transactions.

As a result of advertising campaigns in the 1980s by competitors Visa Inc and MasterCard Inc aimed at convincing merchants and consumers to use cards with cheaper fees, American Express tightened contract provisions with merchants to stop what it called discrimination against its cards.

The company said in a court filing that lower fees paid by merchants would mean fewer benefits for cardholders.

The Obama administration and 17 U.S. states sued American Express in 2010 alleging that the company's anti-steering contract requirement obstructs merchants from using competition to try to keep credit card fees from increasing.

A trial court agreed, finding that the rules kept lower cost networks out of the field and led to higher prices for merchants and consumers. In September 2016, the 2nd U.S. Circuit Court of Appeals in New York overturned that ruling.

The states - Connecticut, Idaho, Illinois, Iowa, Maryland, Michigan, Montana, Ohio, Rhode Island, Utah and Vermont - appealed the 2nd Circuit ruling to the Supreme Court.

Visa and MasterCard settled similar lawsuits in 2011 by agreeing to change their rules.

A number of companies backed the states' appeal in the American Express case, including supermarket and drugstore chains Kroger Co and Walgreens, which said credit card fees are among their largest and fastest-growing expenses.

Southwest Airlines Co said in a legal brief that American Express had insulated itself from competitive market forces, resulting in "hundreds of millions (if not billions) of dollars in excess costs incurred by Southwest, other merchants, and their customers."

(Reporting by Andrew Chung; Editing by Will Dunham)