By Jonathan Stempel

NEW YORK (Reuters) - A federal appeals court said on Wednesday the U.S. government cannot seize a Midtown Manhattan office tower originally built by the Shah of Iran, whose owners it claimed were fronts for the Iranian government.

The 2nd U.S. Circuit Court of Appeals also said hundreds of victims of "terrorist acts" linked to Iran could not force the owners of 650 Fifth Avenue to turn over the building or pay unsatisfied money judgments they had won against the country, finding no proof that the owners and Iran were legally one and the same.

Both decisions were written by Circuit Judge Richard Wesley for a unanimous three-judge panel, and totaled 145 pages.

They overturned rulings by U.S. District Judge Katherine Forrest against the nonprofit Alavi Foundation, which promotes Islamic culture and the Persian language, and 650 Fifth Avenue Co, of which Alavi is a 60 percent owner.

The owners had claimed they were given no chance to show why they should not be held liable. Iran was not a defendant in the lawsuits, which were returned to Forrest's courtroom, including for a possible trial in the government's forfeiture case.

"We are very pleased," Daniel Ruzumna, a lawyer for the owners, said in an email. "We look forward to vindicating our clients' rights and interests at trial."

James Bernard, a lawyer for the victims, said his clients also looked forward to a trial.

The office of U.S. Attorney Preet Bharara in Manhattan did not respond to a request for comment.

The 36-story building in question is just north of Rockefeller Center and St. Patrick's Cathedral, and would likely fetch hundreds of millions of dollars in a sale.

In seeking the forfeiture of that building, several other properties and various bank accounts, authorities accused Alavi of engaging in money laundering that violated U.S. sanctions against Iran, and knowing that the building's minority owner, Assa Corp, was backed by state-controlled Bank Melli.

But Wesley said Forrest failed to properly review evidence that demonstrated a "genuine dispute" as to whether Alavi knew of Bank Melli's control over Assa.

He also said Forrest acted too quickly in rejecting defense arguments that authorities waited too long to seek a forfeiture, and that evidence obtained by a search warrant should have been suppressed.

In the victims' case, Wesley said Forrest erred in finding that the building's owners could under the federal Foreign Sovereign Immunities Act qualify as Iran itself, or be deemed its agents or instrumentalities.

The appeals court directed Forrest to examine whether the victims could prevail under another federal law, the Terrorism Risk Insurance Act.

The cases are In re: 650 Fifth Avenue and Related Properties, 2nd U.S. Circuit Court of Appeals, No. 14-2027; and Kirschenbaum et al v. 650 Fifth Avenue and Related Properties in the same court, No. 14-1963.

(Reporting by Jonathan Stempel in New York; Editing by Richard Chang and Jonathan Oatis)