By Dan Levine and Heather Somerville

SAN FRANCISCO (Reuters) - A U.S. judge on Thursday rejected an attempt by Uber Technologies Inc to settle a class action lawsuit with drivers who claimed they were employees entitled to expenses.

In a case that has been closely watched in Silicon Valley, where many companies use on-demand workers, U.S. District Judge Edward Chen in San Francisco ruled that the settlement was not fair or adequate for drivers.

Some drivers had objected to terms of the settlement valued at up to $100 million, which would have affected roughly 385,000 current and former drivers in California and Massachusetts.

Uber drivers contended in the lawsuit they should be deemed employees and entitled to reimbursement for expenses, including gasoline and vehicle maintenance. Those expenses are now borne by the drivers.

The proposed settlement would have kept drivers classified as independent contractors. Several drivers who were part of the class filed objections with the court, particularly because the proposed amount was well below the total potential damages in the case of roughly $850 million.

Chen noted that part of the proposed settlement, $16 million, would only have been paid to drivers if Uber's valuation grew by a certain benchmark within a year of any initial public offering.

Because Uber could not provide specific information that such an outcome was likely, Chen said he would not consider those dollars as part of the settlement. The remaining $84 million, Chen said, represented a "substantial discount" on the full value of driver claims.

In a statement, Uber said it believed the settlement was fair and reasonable.

"We're disappointed in this decision and are taking a look at our options," the company said.

An attorney for drivers could not immediately be reached.

(Reporting by Dan Levine; Editing by Jonathan Oatis and David Gregorio)