* EPA to announce rules to lower emissions on Friday
* Sulfur in gasoline would be slashed by 60 pct by 2017
* EPA: every $1 in industry costs would cut $7 from health bills
* Oil group says rules will make gasoline more expensive (Updates with details from EPA source)
By Timothy Gardner
WASHINGTON, March 28 (Reuters) - The Obama administration will propose on Friday long-awaited rules to slash smog-forming emissions from gasoline that have been linked to lung and heart ailments, health groups and an environmental regulator source said on Thursday.
The Environmental Protection Agency will propose the so-called Tier 3 rules that will require refiners to reduce the sulfur content of gasoline to 10 parts per million by 2017 from the current standard of 30 ppm, an agency source said on condition of anonymity.
Reducing sulfur in fuel helps cars burn cleaner and reduces emissions of tiny particles, volatile organic compounds, and nitrogen oxides that can cause lung and heart illnesses
Oil industry groups, Republicans, and some conservative Democrats have opposed the rules saying they would make gasoline more expensive for consumers still struggling in the recovering economy.
Refinery groups say the rules could cost that industry $14 billion to $15 billion a year. In addition, the American Petroleum Institute, the main energy industry lobbying group, has said the rules could increase refinery operating costs by up to 9 cents per gallon.
But health groups say the rules will cut billions in doctors' bills. A study released by Navigant Consulting last year said the rules could cut healthcare costs for lung and heart diseases by $5 billion to $6 billion a year by 2020 and by double that amount by 2030.
"This is the first big environmental initiative in the Obama administration's second term," said Frank O'Donnell, president of Clean Air Watch, who was briefed on Thursday. "It is the most effective tool available to reduce smog."
The EPA estimates total health savings from the proposed rules would be between $8 billion and $23 billion annually by 2030 and that every dollar spent to comply with the rules would yield seven dollars in healthcare savings. It estimates some 2,400 premature deaths would be prevented by 2030.
Those rules also would cost refiners less than a penny a gallon once they are fully in place, the EPA estimates.
And they would include flexibility for small businesses including additional lead time for compliance, the EPA source said.
Senator Kirsten Gillibrand, a Democrat from New York, had urged President Barack Obama to propose the rules in 2010 and urged his administration to move quickly to finalize them.
"We've cleared a crucial step in the process, and I will continue to urge the administration to move quickly to finalize the rule this year," said Gillibrand.
Republican lawmakers had tried to stop the push. Representative Ed Whitfield of Kentucky, the chairman of the House Energy and Power subcommittee, introduced a bill last year to stop the EPA from issuing the Tier 3 measures.
The rules are supported by many automakers who will also have to take steps to meet them. The proposal will harmonize federal regulations with those in place in California, allowing automakers to sell the same cars in all 50 states.
The Auto Alliance, a group of 12 manufacturers, has said cutting sulfur content in gasoline has side benefits including improving fuel efficiency and reducing emissions of greenhouse gases linked to global warming. The EPA estimates the rules will cost $130 per car by 2025.
The proposal will be open for public comment and hearings before being finalized. (Reporting by Timothy Gardner; Editing by Bob Burgdorfer and Paul Simao)