Supreme court judges have unanimously prevented the Treasury from freezing the assets of five terror suspects.
The ruling found that ministers did not have the power to curtail individuals' rights in this way without the express approval of parliament.
It does not mean the assets of Mohammed al-Ghabra, Hani el Sayed Sabaei Youssef, Michael Marteen, formerly Mohammed Tunveer Ahmed, Mohammed Jabar Ahmed and Mohammed Azmir Khan will be unfrozen, however.
The government has pledged to introduce "fast-track legislation" which will get parliament's backing for the continued asset-freezing.
The ruling related to 2006 orders which responded to UN security council resolutions about taking further action against terrorist financing.
The Treasury pointed out that the ruling did not challenge the UK's obligations under the UN's charter to freeze the assets of suspected terrorists.
"The government is committed to maintaining an effective, proportionate and fair terrorist asset-freezing regime that meets our UN obligations, protects national security by disrupting flows of terrorist finance, and safeguards human rights," a spokesman said.
Liberal Democrat home affairs spokesman Chris Huhne said the courts had been right to reject "another dubious government measure", after what he called the "control orders embarrassment".
"It is simply not acceptable for Labour to behave as if we are a banana republic and go around arbitrarily arresting people or confiscating their property without due process under the rule of law," Mr Huhne commented.
"The government's desperation to circumvent parliament is creating bad laws, legal defeats and hefty bills for the taxpayer. It has to stop."