By Mica Rosenberg

NEW YORK (Reuters) - A U.S. appeals court on Friday upheld a ruling against Exxon Mobil Corp ordering the company to pay $105 million in damages for polluting New York City's groundwater with a toxic gasoline additive.

The U.S. Second Circuit Court of Appeals affirmed a 2009 jury verdict that found Exxon contaminated water supply wells when methyl tertiary butyl ether (MTBE) leaked from its underground storage tanks in the borough of Queens.

The appeals court rejected Exxon's arguments that it was required to use the additive under the federal Clean Air Act. Exxon said it would appeal to the U.S. Supreme Court.

An oxygen-containing substance that is added to gasoline to promote more complete combustion and reduce air pollution, MTBE was one of several additives recommended by regulators to reduce emissions.

It has now largely been phased out of the U.S. fuel supply because of the danger to groundwater.

"MTBE has not been used for seven years," said Exxon spokesman Todd Spitler. "Cleanup successfully continues."

New York City claimed Exxon went ahead and used the chemical in the 1980s through the first half of the 2000s despite warnings from its own scientists and engineers that it could be harmful in areas that relied on groundwater for drinking.

MTBE has been identified as an animal carcinogen and a possible human carcinogen and causes water to smell foul and taste bad.

"Yet again, this company, which carelessly polluted our groundwater supply, has been put in its place by a court," New York City Mayor Michael Bloomberg said in a statement. "This should be a warning to any company whose actions threaten New Yorkers' health and quality of life."

The water wells in southeast Queens that were contaminated serve as a backup supply for the city's drinking water when the reservoirs upstate go offline because of repairs or droughts.

The city is planning to install and upgrade treatment stations to remove the MTBE to ensure the drinking water meets the same standards as the upstate system, the New York City Law Department said in a statement.

"What's at issue here isn't just the choice to use MTBE, it's the failure to warn people and the failure to take the steps that ... would have avoided or mitigated the environmental impacts of it," said attorney Victor Sher of the San Francisco-based law firm of Sher Leff that represented the City of New York.

Judges in the Second Circuit said the 11-week New York trial in 2009 was meant to serve as a bellwether case to provide guidance for other MTBE complaints that have been brought around the country.

In April, a New Hampshire jury ruled that Exxon would have to pay $236 million for MTBE contamination of drinking water in the state. The company said at the time it had strong arguments for an appeal.

Other major oil companies, including Royal Dutch Shell PLC, BP PLC and Chevron Corp, previously settled MTBE claims with the city for a total of $15 million, the law department said.

(Reporting by Mica Rosenberg; Editing by Howard Goller and Prudence Crowther)