Three terror suspects have won their appeals over the use of secret evidence to impose controversial control orders on them.
A panel of nine Law Lords found the procedure contravened the European Convention on Human Rights and ordered that the cases should be heard again.
The Government introduced control orders, which impose virtual house arrest, in 2005 after the Law Lords ruled the previous policy of detaining foreign terror suspects without trial or charge was incompatible with human rights.
Lord Phillips, the senior Law Lord, said that a judgment at the European Court of Human Rights (ECtHR) required the appeals to be allowed.
Lord Hoffman agreed, but added: "I do so with considerable regret because I think that the decision of the ECtHR was wrong and that it may well destroy the system of control orders, which is a significant part of this country's defences against terrorism."
Home Secretary Alan Johnson said the ruling is "extremely disappointing", and added: "Protecting the public is my top priority and this judgment makes that harder. Nevertheless, the Government will continue to take all steps we can to manage the threat presented by terrorism."
But human rights groups welcomed the Lords' decision, and called on the Government to scrap the control order regime altogether.
Amnesty International said: "The Law Lords have rightfully found that the control order regime in which the accused cannot see, challenge or effectively defend themselves against the evidence is unfair and a violation of human rights."
Shami Chakrabarti, director of Liberty, said: "I can think of no better way for the Prime Minister to make a fresh start for his Government than to abandon the cruel and counter-productive punishments without trial instituted by his predecessor."
