By Gary Gentile in Washington and Sonia Smith in New Orleans

July 9 - A US Appeals Court July 8 rejected a government request to stay a lower court order that overturned a six-month moratorium on deepwater drilling.

The Interior Department, which had requested the stay, said it would respond to the court decision by issuing a new moratorium. No timing on the new drill ban was given.

The three-judge panel ruled that the government had not demonstrated that it would suffer irreparable injury if the stay was not granted. The court also ruled the government failed to prove that drillers would resume their activity while the lower court ruling was appealed.

The court ruled that Interior Secretary Ken Salazar could seek emergency relief if and when he can show that drilling activity has begun or is about to begin.

"As the court recognized, the Secretary can seek a stay on an emergency basis in the event that an operator seeks to resume deepwater drilling activity in the Gulf," Interior Department spokeswoman Kendra Barkoff said in a statement. "We continue to believe that it is not appropriate to drill new deepwater wells in the Gulf until we can be assured that future drilling activity can be conducted in a safe and environmentally responsible manner.

"Based on what we have learned since the BP oil spill it has become increasingly clear that companies may not have adequate containment and response capabilities to respond to a spill and therefore as the Secretary has said previously, he will be issuing a new moratorium."

The government imposed a six-month moratorium on drilling in waters of more than 500 feet in May in response to the April 20 blowout of the BP Macondo well in the Gulf of Mexico.

Drillers, including Hornbeck Offshore Services and Bee Mar, filed a lawsuit against the decision and asked for a preliminary injunction against the moratorium.

A federal court judge sided with the drillers, saying the government's blanket moratorium was "arbitrary and capricious." The government asked for a stay of the decision pending appeal. An hour-long hearing was held in New Orleans July 8.

The court on July 8 also ordered that the government's appeal of the lower court ruling be expedited. The court ordered that a special merits panel hear the government's appeal of the preliminary injunction during the week of August 30.

Oral arguments in the case on July 8 revolved not around the broad issue of whether a moratorium is justified, but the narrower issue of satisfying the legal requirements for the issuance of a stay.

Michael Gray, a lawyer representing the Interior Department, argued that the plaintiffs in the case could not show that they would suffer irreparable harm if the stay was granted.

But Judge Jerry Smith told Gray that the standard for a stay was not irreparable harm. All the plaintiffs had to show was that they would suffer "substantial" harm.

"Is it still the secretary's position that the plaintiffs in this case are not harmed by the moratorium?" Smith asked.

"I think it's clear from the declarations that they sustained some harm in the form of contract cancellations and different effects," Gray conceded.

"If you have acknowledged that these parties will sustain substantial harm by the granting of a stay, then that should be the end of the proceeding; the stay should be denied," Smith said.

Salazar has said he is likely to issue a second, more narrowly tailored moratorium that would stand judicial scrutiny.

Drillers, as well as politicians representing the gulf states, have argued that the blanket drilling ban would cost hundreds if not thousands of jobs and have a devastating impact on the region's economy.

Louisiana Governor Bobby Jindal praised the court decision July 8, but cautioned that the future of deepwater drilling in the gulf was still uncertain because of Salazar's intention to issue a second moratorium.

"We absolutely want drilling to be done safely and do not want another spill or one more drop of oil on our coast or in our water, but thousands of Louisianians should not have to lose their jobs because the federal government can't adequately do its job of ensuring drilling is done safely," Jindal said.

"The hearing today showed again that there is no clear pathway from the federal government about how to increase the safety of drilling."

Analysts have said that drillers are unlikely to resume activity anytime soon and maybe not for months

The Interior Department has issued two sets of new safety standards that must be met before any drilling can resume.

The delay in issuing new permits until tougher safety requirements can be met amount to a de facto moratorium, analysts have said.