A federal appeals court on Thursday largely reversed a landmark set of rule changes from the Federal Communications Commission (search) that would have allowed companies to own more radio and television stations in the same market.

The decision by the U.S. Court of Appeals for the Third Circuit in Philadelphia marked a major setback to the FCC's efforts to deregulate media ownership rules and a victory for public interest groups that had opposed the measures.

The rule changes have been the subject of much debate about the concentration of media ownership ever since they were announced in June 2003. The plaintiffs against the FCC said the rules would limit the diversity of voices on the airwaves, while the FCC said the old rules had become outdated.

The court also kept in place an order it made last September blocking the rules from taking effect.

In their 2-to-1 decision, the judges threw out rules that would have allowed greater ownership of television and radio stations in the same market. However, they also found that the FCC was within its rights to repeal a blanket prohibition on companies owning both a newspaper and a television station in the same city.

"This is a big, big win for diversity," said Andrew Jay Schwartzman, CEO of the Media Access Project, a Washington, D.C.-based public interest law firm that led the lawsuit against the FCC.

"The court recognized that debate and democratic values are more important than letting big media corporations grow bigger," Schwartzman said. "It's especially important that the court has told the FCC to remove its deregulatory thumb from the scales."

Schwartzman said he was slightly disappointed that the court did not reverse the FCC's move to repeal the ban on cross-ownership of newspapers and TV stations in the same city, but he noted that the court asked the FCC to reconsider the decision in light of Thursday's ruling.

FCC chairman Michael Powell (search) called the court's decision "deeply troubling" and said it "hampers the flexibility of the agency to protect the American public."

Powell noted that the court's Chief Judge Anthony Scirica dissented from the ruling, saying that the court "has substituted its own policy judgment for that of the FCC and upset the ongoing review of broadcast media regulation mandated by Congress."

But consumer advocates and other opponents of the FCC's efforts to deregulate media ownership were quick to hail the court's decision.

Gene Kimmelman, senior public policy director for Consumers Union (search), one of the plaintiffs, called the Third Circuit court's ruling "a complete repudiation of rules that would allow one or two media giants to dominate the most important sources of local news and information in almost every community in America."

FCC Commissioner Michael J. Copps saw the decision as vindication of his vote against the rules. "The rush to media consolidation approved by the FCC last June was wrong as a matter of law and policy," Copps said.

"The Commission has a second chance to do the right thing. We must immediately move forward and redesign our media policy," he said. "This time we must include the American people in the process instead of shutting them out."

The cross-ownership issue had been closely watched by newspaper publishers that also own TV stations, such as Tribune Co. (TRB) and Media General Inc. (MEG). Both companies are pursuing strategies of owning clusters of newspapers and TV in the same market.

John Sturm, CEO of the Newspaper Association of America (search), said the group was pleased that the court left in place the FCC's decision to repeal the across-the-board ban on cross-ownership. He said the industry would continue to press its case for making such combinations possible.

The court's ruling does not affect a separate issue of national limits on broadcast ownership. Last year the FCC raised the limits on the size of the national audience that can be reached by a single owner of TV stations from 35 percent to 45 percent, but Congress later passed a law that put in place a cap of 39 percent.