By David Shepardson

NEW YORK, March 27 (Reuters) - The U.S. National Highway Traffic Safety Administration (NHTSA) said late on Tuesday it was proposing to cancel a planned hike in higher "gas-guzzler" penalties for automakers whose vehicles fail to meet minimum fuel-economy standards.

NHTSA in July suspended a 2016 Obama administration regulation that more than doubled penalties. Automakers protested the hike, saying it could increase industry compliance costs by $1 billion annually.

Congress ordered federal agencies in 2015 to adjust civil penalties to account for inflation. In response, NHTSA under the administration of former President Barack Obama, a Democrat, proposed raising fines for every gallon of fuel that new cars and trucks consume in excess of required standards under the Corporate Average Fuel Economy (CAFE) program, but delayed the effective date to September 2018.

NHTSA said in a proposed regulation released on Tuesday that it "tentatively concludes" that hiking the penalty would have a "negative economic impact."

New York, California and three other U.S. states in September sued the federal government for delaying the rollout of the higher penalties as did several environmental groups.

A federal appeals court has set an April 12 hearing on the lawsuit. On Tuesday, two major auto trade associations intervened on behalf of the government in the suit.

In March 2017, Republican President Donald Trump ordered a review of U.S. vehicle fuel efficiency standards for 2022-25 put in place by the Obama administration, saying they were too tough.

The Environmental Protection Agency is expected to determine by Friday that the standards are "not appropriate" and propose revisions to the rules in the coming months.

NHTSA said previously the increases would potentially result in an additional $30 million in annual civil penalties. Automakers say the increases would dramatically raise costs since they would also boost the value of fuel economy credits used to meet requirements.

Some automakers including some luxury makers historically have opted to pay fines instead of meeting fuel efficiency requirements. Jaguar Land Rover, owned by India's Tata Motors , and Daimler AG, which makes Mercedes-Benz vehicles, paid the most in fines in recent years.

NHTSA said in July many automakers were falling behind current fuel standards and face "the possibility of paying larger CAFE penalties over the next several years."

The Alliance of Automobile Manufacturers, a trade group representing major companies, said it was pleased that NHTSA had issued the proposed rule, but will need time to review the "notice that's just been released before we’re able to offer more." (Reporting by David Shepardson)