SAN FRANCISCO - A state appeals court upheld California's $3 billion stem cell agency Monday against attacks by abortion foes and anti-tax advocates who claimed the agency's managers had conflicts of interest.

The 1st District Court of Appeal upheld a decision by a lower court judge who last year ruled that the California Institute for Regenerative Medicine (CIRM) was legal. The institute was established to issue grants for research for using human stem cells, especially embryonic stem cells, to treat diseases. But nearly all the grants have been held up because of the litigation. It was created when Proposition 71 was passed by 59 percent of the electorate in 2004.

San Diego County's large biomedical community has eagerly vied for the grants. UC San Diego, the Burnham Institute, the Salk Institute and The Scripps Research Institute have banded together in a joint stem cell program, and local companies such as Carlsbad's Invitrogen Corp. are developing products for this specialized field.

In its lawsuit, The California Family Bioethics Council argued that the stem cell agency is rife with conflicts of interest, saying officials from three university systems who sit on the board overseeing the agency could benefit because their various schools are applying for millions in research funds from the agency.

As written, Prop. 71 dictates that those officials must recuse themselves when the board is considering an application from their schools.

"Prop. 71 suffers from no constitutional or other legal infirmity," the court ruled, 3-0.

If the opponents' expected appeal to the California Supreme Court is denied, the stem cell program will then proceed as intended, said David Gollaher, president and chief executive of the La Jolla-based California Healthcare Institute.

"The only thing that has stalled the grants from being made to Scripps and Salk and Burnham and UCSD and the whole program has been the litigation," Gollaher said. "Once that overhang is removed, CIRM will be able to fund the research for the full $300 million a year over 10 years."

Until the lawsuits are resolved, the agency can't borrow any money from Wall Street bond dealers. The state has loaned the agency $150 million, and philanthropic organizations have loaned it another $45 million to fund research.

The appeals court said it was skeptical of claims that Prop. 71 violated the state's "single subject" law when putting initiatives on the ballot. Opponents said the proposition allows for more than just stem cell funding.

The appeals court, among other things, found that the ballot measure's general language appeared to ensure that all stem cell research funding wouldn't be hindered if it overlapped with other kinds of medical research. In addition, the court rejected arguments that the agency isn't under the "exclusive control and management" of the state.

The People's Advocate and National Tax Limitation Foundation argued that since the University of California officials on the agency's oversight board weren't appointed by elected officials - they were appointed by their chancellors - they aren't public officials and had no authority to spend state money. But the court noted that chancellors of those schools are appointed by the regents who are appointed by the governor.

"It's so obvious that there are conflicts of interest between those who are responsible for distributing funding and those who receive the funds," said Robert Tyler, an attorney for Advocates of Faith and Freedom who helped the plaintiffs craft the lawsuit.

Tyler said he expected the case to be appealed to the California Supreme Court.

Robert N. Klein, chairman of the committee that oversees the stem cell program, said in a statement that he was "very pleased" with the decision.

"Once again, the judiciary has upheld the constitutionality of California's innovative stem cell research project - in its entirety, without equivocation, and with absolutely no room for further argument," Klein said. "We are grateful that the Court rendered this decision so quickly, as it speeds the day when the will of 7 million voters can be fully realized."

Human embryonic stem cells are created in the first days after conception and give rise to all the organs and tissues in the human body. Scientists hope they can someday use embryonic stem cells to replace diseased tissue. But many social conservatives, including President Bush, oppose the work because human embryos are destroyed when the cells are extracted from the embryos.

Prop. 71 came as a reaction to Bush administration's 2001 decision to forbid federal funding of almost all research with embryonic stem cells, except for some already taken from embryos and bred into cell "lines." Federal funding is capped at $25 million a year. Many scientists say the approved embryonic stem cell lines are not adequate, because they are contaminated with animal proteins, and only represent a small set of human genetic variability.

On Feb. 16, the agency gave nearly $45 million in research grants to about 20 state universities and nonprofit research laboratories, far exceeding the federal government's annual outlays for the controversial work.

In issuing the first significant research grants in its two-year history, the agency became the nation's biggest financial backer of human embryonic stem cell research.

Stanford University researchers were the biggest winners when they landed 12 grants worth a combined $8 million, including the first publicly financed human embryo cloning project. Other schools receiving grants included eight campuses of the University of California and the University of Southern California.

The Salk Institute in San Diego and the J. David Gladstone Institute in San Francisco were among the 10 nonprofit research centers receiving grants.

The outlook for stem cell research has shifted recently, Gollaher said. In the short run, stem cells may prove most useful as models in which to study diseases and how they develop at the molecular level. That understanding may enable researchers to develop drugs to prevent, stop or reverse the disease process.

- Staff writer Bradley J. Fikes contributed to this story.