Updated from 3:46 p.m. EST

A federal appeals court dealt a punishing blow Thursday to investors looking to blame their losses on Wall Street analysts who had hyped tech stocks during the Nasdaq bubble.

In a ruling handed down Thursday, a three-judge panel affirmed a lower court's ruling that tossed out a class-action lawsuit filed against Merrill Lynch ( MER) and the firm's former Internet guru, Henry Blodget.

The 45-page decision from the U.S. 2nd Circuit Court of Appeals could pose a considerable hurdle to similar lawsuits filed against other brokerages. In the wake of a far-reaching regulatory investigation into conflicts of interest in the brokerage business, hundreds of lawsuits were filed against analysts and Wall Street firms involving allegations of tainted stock research.

But in siding with Merrill, the appellate court said the investors could not merely allege that Blodget's stock research was fraudulent to collect damages. The investors had to show that any "alleged misrepresentations" in those reports were the direct cause of their losses.

"It is not enough to allege that a defendant's misrepresentations and omissions induced a 'purchase-time value disparity' between the price paid for a security and its 'true investment quality,'" the court said.

The ruling endorsed much of the reasoning used by U.S. District Court Judge Milton Pollack, who dismissed the investor lawsuit in July 2003. In that ruling, the veteran jurist was highly dismissive of the investors' claims, lambasting them for being naive and "high risk" speculators.

Pollack, who at the time was one of the oldest serving federal judges, died last year at 97.

A Merrill Lynch spokesman reacted favorably to the appellate court's ruling, saying the firm is pleased the judges found the lawsuit had "no merit."

At the time of Pollack's ruling, some in the legal profession felt it had a good chance of being overturned on appeal. Critics had said the judge's rulings boil down to a "buyer beware" argument that flies in the face of the $1.4 billion settlement Wall Street firms agreed to in the tainted-research investigation.

In fact, New York Attorney General Eliot Spitzer, whose office initiated the conflict of interest investigation, filed a so-called friend of the court brief in the appeal, siding with the investors.

Spitzer's investigation into Wall Street's unsavory business practices began with Merrill Lynch. Spitzer made public dozens of internal emails that showed Blodget and other Merrill analysts didn't believe many of the strong buy recommendations they were slapping on tech stocks. The emails revealed that the Merrill analysts, in many cases, were pushing tech stocks simply as way of securing investment-banking work from those companies.

A Spitzer spokesman could not immediately comment on the court's ruling.

The appellate court ruling directly affects more than 30 lawsuits filed by investors against Merrill over allegedly faulty recommendations the firm's analysts had made on various technology and Internet stocks.

But the impact of the ruling is likely to be felt in other lawsuits where investors cannot show a direct link between a research report and their losses. It also could be used against investors in thousands of arbitration cases that have been lodged against the securities industry.

Jacob Zamansky, a securities attorney who often represents investors, says the ruling is bad news for investors, but not necessarily a "fatal'' blow to pending lawsuits and arbitrations.

He says the Merrill lawsuits were flawed because most of the named plaintiffs did not have either a direct relationship with either Blodget or a Merrill broker. Zamansky says investors who can show that they relied on an analyst research report and discussed it with their brokers, stand a better chance of recovering damages in court or before an arbitrator.

"Bad facts make bad law,'' says Zamansky. "Many of these investors are online traders who didn't make any connection between the research and their trades.''