By Mike Scarcella

(Reuters) - Washington state's highest court on Tuesday cleared the way for Albertsons Companies Inc to pay a $4 billion dividend ahead of the grocer's proposed deal with rival Kroger Co, as the justices declined to take up a claim that the payout would harm industry competition.

The Washington Supreme Court made the decision after a lower court judge refused last month to issue a preliminary injunction against the dividend. The Washington attorney general's office in November sued to block the dividend, arguing that it would weaken Albertsons before Kroger's $25 billion purchase.

Kroger is the country's largest supermarket chain, and Albertsons is the second largest. The merger proposal will be reviewed by the Federal Trade Commission, which polices merger and acquisition activity for compliance with antitrust law.

The decision was a rare win for the grocer, which has faced blowback for its merger proposal from unions and some Democratic members of the U.S. Congress.

An Albertsons spokesperson did not immediately comment on the court's order, but the company has said it would move to make the dividend payment as soon as possible.

In a statement, Washington Attorney General Bob Ferguson said his office was "surprised and disappointed the Supreme Court decided not to hear this case."

"I want to be clear: This merger is far from a done deal," Ferguson added. "My team and I will be conducting a thorough review."

Previous court orders in Washington state had barred Albertsons from making the dividend, which it has defended as "a private business decision supported by Albertsons' strong financial performance."

Lawyers for Albertsons have said the decision to return capital to shareholders was "unilateral and independent" of the company's proposed merger with Kroger.

A separate legal challenge to the dividend is pending in the U.S. Court of Appeals for the District of Columbia Circuit. But no order in the case bars Albertsons from moving ahead with the payout.

Chief executives of the two grocers in November defended the $25 billion proposed tie-up at a hearing before a U.S. congressional committee.

Democrat U.S. Senator Amy Klobuchar, a leading voice on antitrust matters, said at the hearing that she and others were concerned the merger would harm competition and lead to higher costs for consumers.

(Reporting by Mike Scarcella in Maryland; Editing by Leslie Adler)