WARNING: This story contains language in paragraph 13 that may be offensive to some readers.

* Reverse redlining case to continue

* Wells Fargo says lawsuit lacks merit (Adds Wells Fargo comment, details and background throughout)

By Jonathan Stempel

NEW YORK, July 2 (Reuters) - A federal judge has rejected Wells Fargo & Co's (WFC.N: Quote, Profile, Research) effort to dismiss a closely watched lawsuit accusing the largest U.S. mortgage lender of steering black borrowers in Baltimore to high-cost subprime mortgages.

Judge Benson Legg of the U.S. District Court in Baltimore ruled that the city may continue pursuing its claims that the bank has since 2000 pushed blacks into costly or onerous mortgages when they could have afforded prime loans, or that its practices had a disparate negative impact on blacks.

In a four-page ruling, Legg concluded that Baltimore's allegations "are sufficiently plausible and grounded in fact" to allow the case to proceed.

The bank had argued that Baltimore had lacked standing to sue, but Legg said this issue was "inextricably intertwined with the facts central to the merits of the dispute."

Cara Heiden, co-president of Wells Fargo Home Mortgage, said the bank believes the lawsuit lacks merit, and plans to "set the record straight" and show its commitment to "fair, responsible and nondiscriminatory lending."