By Colin Packham

SYDNEY (Reuters) - The Papua New Guinea Supreme Court on Thursday dismissed an application to send asylum seekers held on an isolated island to Australia on a paperwork technicality.

A ruling in favor of the 302 detainees would have ordered the PNG and Australian governments to transfer them to Australia within 30 days, a political nightmare for Prime Minister Malcolm Turnbull.

Under Australia's tough immigration laws, asylum seekers intercepted trying to reach the country by boat are sent for processing on PNG's Manus island and the tiny South Pacific island nation of Nauru.

The policy has won past elections and has bipartisan political support.

Lawyer Ben Lomai confirmed the case had been dismissed and that the detainees planned to refile the application.

The case was dismissed because the court filings were signed by the principal lawyer, Lomai, instead of the direct claimants, Ian Rintoul, a spokesman for the Refugee Action Coalition, who was present at the hearing, told Reuters.

"The reality is the refugees are facing longer in detention and that's extremely disappointing," he said. "The legal issues have not been resolved and it does not change the fact that these men are detained illegally."

The group will go back to Manus next week to collect the signatures but getting a hearing at the Supreme Court may be difficult, Rintoul added.

"We lost trust in any court or lawyer or justice," Behrouz Boochani, an Iranian who has been on Manus for more than three years, told Reuters.

Australia has vowed the asylum seekers will never set foot in the country after being intercepted by its navy and shipped to Manus.

Many of the asylum seekers have spent three years in the center, which the Supreme Court ruled in April was unconstitutional and must close.

For men like Abdul Aziz, 24, who fled his home in Sudan amid a bloody civil war, the court case had stirred hopes of finally leaving the center after 38 months.

"I'm optimistic that after the court case, I will be sent back to Australia. We are keeping our fingers crossed," Aziz told Reuters by telephone before the case was dismissed

"We sought asylum from Australia, not PNG."

A ruling in favor of the 302 detainees would have set a precedent for all 823 detainees, asylum seekers predominately from Iran, Afghanistan and Pakistan.

The United Nations and human rights groups have condemned Australia's immigration policy, citing human rights abuses in the centers.

Many asylum seekers on Nauru are being driven to attempt suicide to escape the prison-like conditions they face in indefinite detention, Amnesty International said last week, amid reports of assaults and sexual abuse.

(Editing by Melanie Burton and Nick Macfie)