By Drew Singer

WASHINGTON (Reuters) - Myriad Genetics Inc illegally patented acts of nature when it claimed ownership of two genes linked to cancer, the federal government told an appeals court on Friday.

Lawyers from Myriad, as well as the American Civil Liberties Union and the U.S. Patent and Trademark Office appeared in the U.S. Court of Appeals for the Federal Circuit at the direction of the U.S. Supreme Court in order to examine the impact of Mayo v. Prometheus, the high court's March ruling that companies cannot patent observations about nature.

The three parties spent roughly 40 minutes arguing whether the 2012 ruling should affect a 2011 Federal Circuit appeals decision allowing Myriad to patent two human genes that account for most forms of breast and ovarian cancers.

The Myriad case has been watched closely by the biotechnology industry, with some insiders saying a ruling against gene patenting could have a devastating effect on future innovation.

That includes the fledgling field of personalized medicine, which depends on genetic tests, such as those developed by Myriad, to match patients with specific therapies.

Myriad lawyer Greg Castanias argued on Friday that the company's method is similar to turning a tree into a baseball bat. The bat is wood from a tree, he said, but the process is what makes it man-made and fair game for a patent.

But Patent and Trademark Office lawyer Melissa Patterson likened the practice to claiming a patent for coal just because they were the first to remove it from the ground.

Judges William Bryson, Alan Lourie and Kimberly Moore, the same three-judge panel of the Federal Circuit which ruled in Myriad's favor last year, heard Friday's arguments.

It could take months before a decision is reached, and an appeal to the Supreme Court is likely, Castanias said.

The Federal Circuit case is Association of Molecular Pathology v. U.S. Patent and Trademark Office, No. 2010-1406.

(Reporting by Drew Singer; editing by Eileen Daspin and Carol Bishopric)