LOUISVILLE, Ky. — A federal appeals panel yesterday gave opponents of publicly funding faith-based organizations another chance to make their case, sending the long-running Kentucky case back to a lower court for more consideration.

Plaintiffs contend that Kentucky Baptist Homes for Children, now known as Sunrise Children's Services, received $100 million in state funding and used some of the money to indoctrinate children in its care.

"This case gives Kentucky taxpayers pretty much a green light to challenge public funding of religion," said Barry W. Lynn, executive director of Americans United for Separation of Church and State, in response to the ruling by the 6th U.S. Circuit Court of Appeals in Cincinnati.

Sunrise Children's Services, affiliated with the Kentucky Baptist Convention, cares for abused and neglected children through its residential centers and foster-care placement.

A federal judge in Louisville dismissed the case last year, citing the 2007 U.S. Supreme Court ruling in Hein v. Freedom From Religion Foundation that narrowed taxpayers' rights to sue over allegations of state-sponsored religion.

The unanimous three-judge panel revived the case by ordering new proceedings on First Amendment grounds. The case has sparked arguments over what role government funding may play in faith-based initiatives, such as those begun by former President George W. Bush and continued by President Barack Obama.

The panel said in Pedreira v. Kentucky Baptist Homes for Children that the plaintiffs "have sufficiently demonstrated a link between the challenged legislative actions and the alleged constitutional violations, namely that Kentucky's statutory funding for neglected children in private childcare facilities knowingly and impermissibly funds a religious organization."

Bill Smithwick, president of Sunrise Children's Services, said his agency planned to appeal the ruling.

"We don't believe we're in violation of anything that we've been accused of," he said.

Vikki Franklin, a spokeswoman for the state Health and Family Services Cabinet, said the agency didn't comment on pending litigation. Sunrise has been paid $14.4 million by the state for services between July 2008 and June 30, 2009, Franklin said in an e-mail.

Smithwick's agency prevailed on another matter when the appeals court agreed with the trial judge who had dismissed social worker Alicia Pedreira’s employment-discrimination claim. Pedreira was fired by the former Kentucky Baptist Homes for Children in 1998 after Baptist agency officials learned she was a lesbian.

Pedreira later filed suit claiming religious discrimination in her firing, based on the Baptist church's stance on homosexuality.

In upholding the dismissal of her claims, the appeals panel said Pedreira failed to explain how her firing on the basis of her sexuality constituted religious discrimination.

"Pedreira has not alleged any particulars about her religion that would even allow an inference that she was discriminated against on account of her religion, or more particularly, her religious differences with KBHC," the opinion said.

"It's important for a faith-based organization to be able to hire those that are consistent with their message," said Mathew Staver, chairman of the Liberty Counsel, a conservative Christian legal group.

Lynn, whose Washington-based group has provided legal assistance to the plaintiffs, said he was disappointed that Pedreira’s discrimination claim had been dismissed, but said it was important for the rest of the case to proceed to prevent public funding from going to agencies engaged in "discriminatory hiring."

Plaintiffs included Pedreira and a group of taxpayers. Defendants include Kentucky state government departments and the former Kentucky Baptist Homes for Children.

The plaintiffs alleged several instances in which children said they were forced to attend Baptist services or were not permitted to attend services of other faiths.

"I think the evidence is overwhelming that this funding was a direct support for religious indoctrination," Lynn said in a phone interview yesterday.

Sunrise Children's Services says the agency has a strict policy against religious coercion or proselytizing and does not prevent children from practicing their faith.

Staver, also dean of the Liberty University School of Law, says the Kentucky case has broad ramifications for faith-based organizations receiving public funding.

"It's important that the mere receipt of state funds should not force a religious organization to put its faith principles in the closet," he said.