How to define local static variable inside case statment block?

What errors do you get?  It should work that way, maybe encloing the block in braces helps, e.g.

case Flag_ThreeParamReg: { // <--- here...
      /* Three parameters are in One Modbus register.  Specifically, Modbus
         Register 40057 bits 0-1 contain parameter 2807, bits 2-3 contain
		     parameter 2820, and bit 4 contains parameter 2821. */
		  /* keeps track of number of times we enter this case */
		  static unsigned char count = 1;
		  static unsigned short modbus_reg_40057_save_value;
		  if (count == 1)
			{
				/* save regsiter 40057 in variable reg_40057_saved because this
				   register contains two other parameters. */
				modbus_reg_40057_save_value = *((unsigned short *)val);
				/* extract bits 0-1 from buffer and store back in the buffer */
				*((unsigned short *)val) = 0x0003 & modbus_reg_40057_save_value;
				count++;
			}
			else if (count == 2)
		  {
				/* extract bits 2-3 from buffer and store back in the buffer */
				*((unsigned short *)val - 1) = ((0x000C & modbus_reg_40057_save_value) >> 2);
				/* decrement buffer index so value is fetched from previous register
				   entry */
				*ptr_buffIndex = *ptr_buffIndex - 1;
				count++;
			}
			else if (count == 3)
			{
				/* extract bit 4 from buffer and store back in the buffer */
				*((unsigned short *)val - 1) = ((0x0010 & modbus_reg_40057_save_value) >> 4);
				/* decrement buffer index so value is fetched from previous register
				   entry */
				*ptr_buffIndex = *ptr_buffIndex - 1;
				/* All Three parameters have been processes, reset the counter */
				count = 1;
			}
                } // <--- and here
		break;
                                  

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