* Judge said budget director Mulvaney is rightful interim chief
* Leandra English's lawyer says they will continue to fight case (Adds background on legal arguments and avenue for appear, comment from lawyer)
WASHINGTON, Nov 28 (Reuters) - A U.S. District Court judge on Tuesday sided with President Donald Trump in a legal battle over who should be in charge of the U.S. consumer finance watchdog, allowing White House budget director Mick Mulvaney to serve as acting head.
Judge Timothy Kelly ruled against Leandra English, deputy director of the Consumer Financial Protection Bureau (CFPB) who claimed to be its rightful interim director. He denied her request for a temporary restraining order to block Mulvaney's appointment.
She had argued in a lawsuit suit filed on Sunday that the 2010 Dodd-Frank Wall Street reform law that created the CFPB stipulates that the agencys deputy director is to take over in the short term.
In its defense filed on Monday night, the Trump administration said the 1998 Federal Vacancies Act gives the White House the ultimate power to say who is in charge and granting the restraining order would be an extraordinary intrusion into the executive branch.
Kelly sided with the White House's interpretation of the law following a hearing on Tuesday afternoon.
"Undeniably, the CFPB was intended to be independent, but it is part of the executive branch, Kelly, a Trump appointee, said.
The decision was a blow for Democrats and consumer advocacy groups who had rallied to English's cause, fearing the agency will be weakened by Mulvaney, one of its fiercest critics.
CFPB Director Richard Cordray, a Democrat appointed by the Obama administration, resigned on Friday and named English to lead the agency until a new director was confirmed by the U.S. Senate, a process that could take months.
Hours later, Trump said Mulvaney would lead the agency on an interim basis, sparking an unprecedented showdown.
The CFPB was created to crack down on predatory financial practices after the 2007-2009 financial crisis, but it is reviled by Republicans who say it is too powerful.
Speaking to reporters outside the court in Washington, English's lawyer, Deepak Gupta, said he would ultimately seek to take the case to a higher court.
"I think whatever happens here there is going to be an appeal," he said.
The White House applauded the ruling. "Its time for the Democrats to stop enabling this brazen political stunt by a rogue employee and allow Acting Director Mulvaney to continue the bureau's smooth transition into an agency that truly serves to help consumers, Deputy Press Secretary Raj Shah said.
Trump has long sought to weaken or abolish the 1,600-employee agency, saying too many regulations are suffocating lending. Mulvaney sought to dismantle the CFPB when he served as a Republican in the U.S. House of Representatives.
Democrats say the agency needs to oversee consumer financial products such as mortgages and have power over large non-bank financial companies to protect borrowers.
To fight the ruling, English's next step would be to seek a preliminary injunction against the administration. If that is dismissed, English can appeal the ruling in Circuit Court, legal experts said.
"The ball is now back in English's court," said Alan Kaplinsky, head of the consumer financial services group for law firm Ballard Spahr. (Reporting by Michelle Price, Pete Schroeder, Patrick Rucker and Makini Brice; Writing by Doina Chiacu and Michelle Price; Editing by Jonathan Oatis and Cynthia Osterman)