By Ayesha Rascoe

WASHINGTON (Reuters) - A U.S. federal court on Friday struck down a 2012 target for refiner use of cellulosic biofuels, but upheld the government's goal for use of other advanced fuels.

The divided ruling by the D.C. Circuit Court allowed oil refiners to claim a partial victory after fighting against U.S. renewable fuel targets. But it also gave hope to biofuel producers, who have been defending the mandates.

The American Petroleum Institute filed a lawsuit against the Environmental Protection Agency's 2012 target, requiring refiners to mix 8.65 million gallons of cellulosic biofuels into the U.S. gasoline and diesel.

Cellulosic biofuels are made from sources such as grasses, wood chips and agricultural waste.

When Congress passed the Renewable Fuel Standard in 2005 with the goal of reducing U.S. reliance on oil, it expected such fuels would make up a significant portion of its mandated use of 36 billion gallons of biofuel by 2022.

But development of the innovative fuel source has lagged and refiners argue they should not be punished for failing to use a fuel that is not commercially available.

Every year refiners have to prove they have used a certain amount of advanced biofuels or have bought credits representing use of the fuel by others in an open market. If they do neither they are subject to fines.

The court upheld API's case regarding the cellulosic goal, finding the EPA did not make a "neutral" assessment of the amount of cellulosic biofuels that would be produced last year.

"We are glad the court has put a stop to EPA's pattern of setting impossible mandates for a biofuel that does not even exist," said API Group Downstream Director Bob Greco.

API said refiners and importers would have had to pay over $8 million for credits to fulfill the 2012 mandate.

While an agency may set standards to promote future technology, in this case the court said there was no clear link between the regulations and the innovation.

"Apart from their role as captive consumers, the refiners are in no position to ensure, or even contribute to, growth in the cellulosic biofuel industry," the court said.

Still, the court rejected API's challenge to the government's decision not to lower its goal for use of advanced biofuels in general.

The court agreed with EPA's finding that other advanced biofuels, including imported sugarcane ethanol and biomass-based diesel, could make up for the shortfall in Congress' goal of 500 million gallons of cellulosic ethanol use in 2012.

EPA is reviewing the court's decision and "will determine its next steps," the agency said in a statement.

A coalition of biofuel groups said the court's ruling allows EPA to reinstate the target it had set, as long as the agency could provide information backing the agency's assessment at the time that the volumes were "reasonable achievable."

The court did not accept API's arguments that EPA had to use projections from the Energy Information Administration to set its goals and that the agency should not consider information from cellulosic biofuel producers.

"Although we disagree with the court's decision vacating the 2012 cellulosic volumes, today's decision once again rejects broad-brushed attempts to effectively roll back the federal Renewable Fuel Standard," said the coalition, which included Growth Energy and the Renewable Fuels Association.

(Additional reporting by Timothy Gardner; Editing by David Gregorio)