EBay Inc did not engage in trademark infringement and dilution by selling counterfeit Tiffany & Co merchandise on its website, a U.S. appeals court ruled on Thursday, but it ordered further proceedings over the jeweler's claim of false advertising.

A panel of judges on the U.S. Court of Appeals for the 2nd Circuit in New York heard oral arguments in the dispute last year over Tiffany's claims against eBay, which dated back to 2004.

It is true that eBay did not itself sell counterfeit Tiffany goods; only the fraudulent vendors did, and that is in part why we conclude that eBay did not infringe Tiffany's mark, part of the appeals court opinion said. But eBay did affirmatively advertise the goods sold through its site as Tiffany merchandise.

The law requires us to hold eBay accountable for the words that it chose insofar as they misled or confused consumers.

The opinion was published more than two years after a week-long bench trial before U.S. District Judge Richard Sullivan in late 2007. He ruled on July 14, 2008, that eBay was not liable for trademark infringement by allowing fake Tiffany goods to be sold on the web site by individuals. Tiffany then appealed to the higher court.

We affirm the judgment of the district court with respect to the claims of trademark infringement and dilution, the appeals court said. We return the cause to the district court for further proceedings with respect to Tiffany's false advertising claim.

Tiffany shares were up 1.6 percent at $48.23 in late morning New York Stock Exchange trading, while eBay slipped 0.3 percent to $26.89 on Nasdaq.

The case is Tiffany & Co v eBay Inc, U.S. Court of Appeals for the 2nd Circuit in New York, No. 08-3947.

(Reporting by Grant McCool; Editing by Lisa Von Ahn and Gerald E. McCormick)