UPDATE 4-EU rules Italian bank rescue legal in blow to antitrust watchdog

* EU court overturns Brussels' decision over small lender

* EU Commission had forced bank to reimburse aid

* Italy banks seek compensation for rescues after Tercas (Adds reaction, impact on Carige rescue)

BRUSSELS, March 19 (Reuters) - European Union judges ruled on Tuesday that Italy's rescue plan for an ailing bank five years ago was legal, prompting calls for compensation for savers who subsequently faced stricter terms because Brussels had rigidly interpreted the bloc's rules.

In a blow to EU antitrust regulators, the judges annulled a European Commission decision that rejected the Italian plan for Tercas and forced Rome to recoup financial aid to the bank.

After the dispute with Brussels over the rescue of Tercas, Italian authorities intervened to help four other small banks in 2015 and then saved larger Banca Monte dei Paschi di Siena and two smaller north-eastern Italian banks in 2017.

Those rescues were conducted under less favorable terms for the banks and their creditors, because of the EU's rejection of the Tercas plan, the Italian banking association (ABI) said in a statement, urging the Commission to reimburse lenders and savers who lost money "due to the consequences of its wrong decisions."

The rescue of Tercas, which was sold to Banca Popolare di Bari as part of the plan, was orchestrated by Italy's deposit guarantee fund, the Fondo Interbancario di Tutela dei Depositi (FITD), which is a private entity fund.

The Commission said that the FITD illegally acted on behalf of the Italian state and ordered it to recoup 300 million euros ($340 million) of grants and guarantees it deemed as state aid.

But the EU general court dismissed this reasoning.

"The FITD acted independently when it adopted the measures for the benefit of Tercas," it said in a statement.

A Commission spokesman said the EU executive "will carefully study the judgment and reflect on possible next steps."

FUTURE RESCUES

The ruling could also have repercussions for the way the Commission treats banking rescues that are under way, including those of Italy's Carige and Germany's NordLB.

EU lawmakers have argued that both could involve illegal state aid.

Salvatore Maccarone, chairman of the FITD, told Reuters the ruling meant the fund could in the future pump money into ailing banks before they risk being wound up by European authorities.

The ruling significantly limited the scope of the EU Commission to intervene in future bank rescues, said Giuseppe Scassellati-Sforzolini, a partner at law firm Cleary Gottlieb who had represented both Banca Tercas and the FITD in the case against the EU executive.

"Someone will have to be accountable for the very serious damage caused to Italy and Europe" by the commission's wrong decision in 2014, the head of the EU parliament's economic committee Roberto Gualtieri said.

The financial damages to Tercas and its buyer Popolare di Bari were limited by the fact that Italian private banks replaced the FITD's 300 million euros in aid blocked by the Commission with their own funds.

The court said the Commission had failed to prove that public money was used to save Tercas, which at the time of its rescue was a small bank with a market share of only about 0.1 percent of Italy's banking assets.

The Commission had also rejected the Tercas plan on the grounds bondholders were spared in the rescue, contrary to EU rules that require banks' creditors to take losses before public money is used to help ailing lenders.

In the subsequent banking rescues, bondholders were forced to take losses. One bondholder who lost money in the rescue of Banca Popolare dell'Etruria committed suicide. ($1 = 0.8811 euros) (Reporting by Francesco Guarascio in Brussels; additional reporting by Stefano Bernabei in Rome and Silvia Aloisi in Milan; Editing by Keith Weir and Alexander Smith)