By Nate Raymond

NEW YORK (Reuters) - Video-sharing website Vimeo LLC cannot be held liable for copyright infringement for unknowingly hosting older music uploaded by its users, a U.S. appeals court ruled on Thursday, dealing a blow to record labels seeking broader protections.

In a victory for internet service providers, the 2nd U.S. Circuit Court of Appeals in New York also held that the mere fact that Vimeo employees had viewed videos with copyrighted sound recordings was not enough to prove the company ignored red flags of infringement.

The case, pursued by Capitol Records and Sony Corp units, was closely watched in Silicon Valley, with Vimeo's appeal drawing support from Facebook Inc, Twitter Inc, Alphabet Inc's Google, and other companies.

"Today's ruling by the Second Circuit is a significant win for not just Vimeo, but all online platforms that empower creators to share content with the world," Michael Cheah, Vimeo's general counsel, said in a statement.

The Recording Industry Association of America, the labels' trade group, said in a statement it was disappointed with the ruling, which it said came despite evidence showing Vimeo's company policy was to look the other way.

"Now, more than ever, it is clear that Congress needs to act to fix a law enacted in the days of dial-up Internet connections," the group said.

A lawyer for Capitol Records, a unit of Vivendi SA, and the Sony units declined to provide immediate comment.

The case focused on the interpretation of the Digital Millennium Copyright Act, or DMCA.

The law protects internet service providers from liability when users upload copyrighted content while requiring them to remove the material if they receive notice or otherwise become aware of the infringement.

The lawsuit, filed in 2009, alleged copyright infringement over music in 199 videos that Vimeo users had uploaded to the site.

U.S. District Judge Ronnie Abrams in 2013 ruled Vimeo was protected under the DMCA safe harbor provisions with regard to 153 videos.

But she held that the safe harbor was not applicable to recordings from before 1972, the year Congress first included them in the scope of federal copyright law. Pre-1972 recordings are protected by state law.

She also said Vimeo could face trial over whether it had known of "red flags" that made infringement apparent.

Thursday's ruling reversed those holdings. Writing for the three-judge panel, U.S. Circuit Judge Pierre Leval said that interpreting the act as leaving providers exposed to liability under state copyright laws would defeat Congress' intent.

"Service providers would be compelled either to incur heavy costs of monitoring every posting to be sure it did not contain infringing pre-1972 recordings, or incurring potentially crushing liabilities under state copyright laws," he wrote.

The case is Capitol Records LLC et al v. Vimeo LLC et al, 2nd U.S. Circuit Court of Appeals, No. 14-1048.

(Reporting by Nate Raymond in New York; Additional reporting by Nikhil Subba in Bengaluru; Editing by Richard Chang and Peter Cooney)