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* Ryanair to appeal European Commission decision
* Ryanair says decision political, plans legal action
* Decision likely to end seven year pursuit of Aer Lingus
DUBLIN, Feb 27 (Reuters) - Budget airline Ryanair will appeal Wednesday's decision by Europe's anti-monopoly watchdog to block its third takeover bid for Aer Lingus , potentially leaving the fate of its Irish rival in limbo for years.
The rebuff was expected after Ryanair said earlier this month the EU Commission had told it of its intention to block the 694-million-euro ($917 million) bid to seize control of Ireland's 75-year-old former flag carrier.
The veto, which is the first time the Commission has twice rejected a proposed takeover, was expected to force Ryanair chief Michael O'Leary to decide whether to finally set its smaller rival free by selling its 30 percent stake.
But by following through on a threat to try to be the first company in a decade to overturn an EU anti-monopoly decision, Ryanair could tie up the stake for years and stymie the Irish government's efforts to offload its own 25 percent holding.
"We believe that we have strong grounds for appealing and overturning this politically-inspired prohibition," a Ryanair spokesman said in a statement.
"We regret that this prohibition is manifestly motivated by narrow political interests rather than competition concerns ... Accordingly, Ryanair has instructed its legal advisers to prepare a comprehensive appeal."
The bid, described by Ryanair as its third and final effort to takeover its rival, included ceding 43 routes to a newly created Irish subsidiary of British airline Flybe and handing to British Airways the routes Aer Lingus operates from London's Gatwick Airport.
The Commission blocked Ryanair's first attempt to take over Aer Lingus in 2007 and Ryanair dropped its second in 2009.