The agency had been expected to decide by this month whether to increase the maximum blend from 10 to 15 percent.
The EPA said Thursday that initial tests "look good" and should be completed by the end of September. A decision will come after the Energy Department completes the testing of the higher blend on vehicles built after 2007.
The ethanol industry has maintained that there is sufficient evidence to show that a 15 percent ethanol blend in motor fuel will not harm the performance of car engines. But the refining industry, small engine manufacturers and some environmental groups have argued against an increase.
Agriculture Secretary Tom Vilsack said the announcement is good news for ethanol producers and that the EPA is taking "a significant step forward" by discussing their timeline.
"With this green light, USDA is surging ahead on our work to provide support to feedstock producers, biofuel refiners and infrastructure installers, such as blender pumps, to ensure that all the pieces of the ethanol supply chain are ready to supply the market demand," Vilsack said.
The EPA has indicated in the past that it will raise the blend, saying a congressional mandate for increased ethanol use can't be achieved without allowing higher blends of the renewable fuel, most of which comes from corn. Congress has required refiners to blend 12.9 billion gallons (50 billion liters) of biofuels in 2010, of which 12 billion gallons would be ethanol. The mandate soars to 36 billion gallons (135 billion liters), mostly ethanol, by 2022.
Ethanol groups immediately expressed disappointment with the delay. Tom Buis, president of Growth Energy, the ethanol group that filed the original petition for the increase, used the oil spill in the Gulf of Mexico as an argument in a letter to President Barack Obama on Thursday.
"With fossil fuels getting dirtier, costlier and riskier to extract, as we are witnessing with the epic catastrophe in the Gulf of Mexico, now is the time we should move on expanding the production and consumption of clean, renewable fuels like ethanol," he said.
The Renewable Fuels Association, another ethanol industry group, criticized the decision to give priority to testing cars manufactured since 2007. The EPA said it is also testing some vehicles built before 2007 but will make a decision after the newer vehicle testing is completed.
The group also argued that the EPA should at least increase the blend to 12 percent in the interim.
Opponents to increasing the blend ceiling include manufactures of smaller engines - used in everything from lawn mowers to boats - because they say those engines are not designed for higher concentrations of the renewable fuel.
This is the second time the EPA has announced a delay of its decision on the blend. The agency pushed the decision to June last December, saying further testing was needed.