(Adds details, comments from supporters of 10% ethanol rule)
MEXICO CITY, Jan 15 (Reuters) - The Mexican Supreme Court ruled against the modification of a fuel rule on Wednesday that would have allowed higher ethanol content in gasoline, similar to content rules in the United States, arguing that regulators exceeded their authority.
The court's decision follows a three-year-old modification of a gasoline regulation by Mexico's Energy Regulatory Commission, or CRE, which sought to allow up to 10% ethanol in gasoline sales nationwide, excluding in the country's three biggest cities, where air pollution is a long-standing concern.
The pre-existing fuel rule allows a maximum 5.8% ethanol content.
Backers of the modification, including U.S. ethanol exporters, argued it would result in cleaner air and that the alternative additive MTBE, which is also used to oxygenate fuels, has been known to contaminate underground water supplies.
MTBE is banned in most of the United States, and besides national oil company Pemex, which produces the additive, other producers like Rotterdam-based LyondellBasell have sought to protect their market share in Mexico.
Both Pemex and LynondellBasell did not immediately respond to requests for comment on the ruling.
The court described the CRE's modified fuel rule as "unilateral," called for a more rigorous science-based evaluation of higher ethanol content and even cited the risk of more air pollution under the regulation.
Kenneth Smith, a former Mexican trade negotiator, said the CRE can and should try again to craft a nationwide 10% ethanol rule.
"It's a win-win for Mexico," he said, arguing it would reduce emissions of greenhouse gases that contribute to global warming as well as help cushion fuel prices.
The Mexican Association for Sustainable Mobility (AMMS), a trade group that backs the 10% ethanol standard, said in a statement that MTBE producers have "systematically obstructed" the entry of ethanol as a competitor in Mexico's fuel market.
"Ethanol is part of the solution to reduce dependence on fossil fuels, use renewable energy, lower gasoline prices, create domestic jobs, boost the agricultural economy and improve the environment, it said.
Backers of ethanol like AMMS argue that Mexican sugar cane and sorgum farmers stand to benefit if 10% ethanol gasoline is permitted, as both commodities can be used to make it.
In a bid to ease disruptions for companies that already make or sell 10% ethanol gasoline in Mexico, the court said it would give them 180 days to continue marketing their supplies before the ruling goes into effect. (Reporting by David Alire Garcia and Sharay Angulo; Editing by Cynthia Osterman and Leslie Adler)