* TMG legal adviser dismisses ruling as having no effect
* New legislation planned after Sunday's election
* TMG shares dip 2 percent before recovering some ground
(Adds quotes, share price, details)
By Dina Zayed
CAIRO, Nov 23 (Reuters) - A court on Tuesday prolonged a legal wrangle that has rattled property investors by saying the government must auction land previously sold directly to Egypt's biggest listed developer Talaat Moustafa Group (TMG).
Shares in TMG and other developers have been buffetted by the case since June, when a court first ordered that the sale of land for TMG's $3 billion Madinaty project was illegal.
The new ruling throws up more legal uncertainty after the cabinet had said it would scrap the original deal but would reallocate the land directly to TMG with the same terms under its right to act in the national interest.
"This could take us back to square one. It has a contagion effect," Naeem brokerage analyst Hisham Halaldeen said. "It could also push the government to pass new legislation as soon as possible."
The cabinet has said it would pass legislation to end ambiguity about land sales after a parliamentary vote on Sunday.
Shares in TMG, which have moved with each twist, initially fell more than 2 percent before settling at 1.3 percent lower. Other real estate firms like Egyptian Resorts, also dipped. The benchmark index was down 1.4 percent by 1033 GMT.
TMG said on Nov. 8 it had signed the new Madinaty contract. But the case has rumbled on in the courts.
"The court rules to ... halt the negative decision which did not implement the previous court verdict to nullify the Madinaty contract ... which included withdrawing the land from the firm and reoffering it in a public auction," Judge Hassan Abdel Aziz of an Egyptian Administrative Court said.
TUSSLE
TMG's legal advisor said Tuesday's verdict was "of no real legal effect" on the firm or its new contract. "This lesson is over, this chapter is closed," Shawky el-Sayed told Reuters.
The cabinet had no immediate comment.
The case has been followed closely in the independent media, which presents it as a tussle between the judiciary protecting the rights of ordinary Egyptians versus a business elite pampered by the government.
"Thank God, we have left victorious. Our courts will help us fight the system," said the engineer who filed the first Madinaty suit, Hamdy Fakharny, after the ruling.
The ruling drew lots of applause from his supporters in the court.
He said he would file a new challenge against Housing Minister Ahmed el-Maghrabi for not implementing court rulings.
The cases hinge on conflicting laws governing state land deals. The original court ruling said a Housing Ministry body sold land to TMG in violation of a 1998 law. The government said it was following legislation which preceded that law.
The cabinet has already drafted a legal framework for state land deals to ease investment, oversee its sale and use, and remove disputes between state bodies.
The TMG case has already prompted several copycat suits challenging state land sales to companies including Palm Hills and Egyptian Resorts.
A hearing in the Palm Hills case was postponed until Dec. 14, the court said. (Additional reporting by Marwa Rashad and Yasmine Saleh; Writing by Dina Zayed; Editing by David Holmes and Jon Loades-Carter)