The 9th U.S. Circuit Court of Appeals' in San Francisco found that prisoners held at Guantanamo Naval Base in Cuba should have access to lawyers and the American court system.
The 2-1 decision was a rebuke to the Bush administration, which maintains that because the 660 men held there were picked up overseas on suspicion of terrorism and are being held on foreign land, they may be detained indefinitely without charges or trial.
Earlier, a three-judge panel of the 2nd U.S. Circuit Court of Appeals said President Bush does not have power to detain American citizen Jose Padilla seized on U.S. soil as an enemy combatant.
The decision could force Padilla, held in a so-called "dirty bomb" plot, to be tried in civilian courts.
In a 2-1 ruling, the court said Padilla's detention was not authorized by Congress and that Mr. Bush could not designate him as an enemy combatant without the authorization.
The Justice Department will ask for an emergency stay of the ruling while it decides whether to ask the full 2nd Circuit court to hear the case, or appeal directly to the Supreme Court, reports CBS News' Stephanie Lambidakis.
The ruling does not preclude the government from charging Padilla with a crime, but does challenge his being held indefinitely in a military brig, without charges or access to a lawyer.
Padilla is accused of plotting to detonate a "dirty bomb," which uses conventional explosives to disperse radioactive materials. The former Chicago gang member was arrested in May 2002 and within days was moved to a naval brig in Charleston, S.C.
"As this court sits only a short distance from where the World Trade Center stood, we are as keenly aware as anyone of the threat al Qaeda poses to our country and of the responsibilities the president and law enforcement officials bear for protecting the nation," the court said.
"But presidential authority does not exist in a vacuum, and this case involves not whether those responsibilities should be aggressively pursued, but whether the president is obligated, in the circumstances presented here, to share them with Congress," it added.
"This is huge," said CBS News legal analyst Andrew Cohen. "It limits the power of the White House to designate and detain citizens this way and it represents by far the Administration's biggest defeat in court since Sept. 11."
"It also sets up an even bigger confrontation down the road between the judicial and executive branches, a confrontation the U.S. Supreme Court ultimately would have to resolve," Cohen added. The question now, he says, is whether the Justice Department will appeal this ruling to the U.S. Supreme.
The ruling could have ramifications for the so-called "20th hijacker," Zacarias Moussaoui.
A federal court has ruled the administration must allow Moussaoui to interview al Qaeda operatives in U.S. custody, whom he says might clear him of capital charges. The government refuses, citing national security concerns.
If higher courts uphold Moussaoui's right to question al Qaeda detainees, it is possible the government will name him an enemy combatant and remove him from the civilian courts.
The San Francisco appeals court, ruling Thursday on a petition from a relative of a Libyan the U.S. military captured in Afghanistan, said the Bush administration's indefinite detention of the men runs contrary to American ideals.
"Even in times of national emergency - indeed, particularly in such times - it is the obligation of the Judicial Branch to ensure the preservation of our constitutional values and to prevent the Executive Branch from running roughshod over the rights of citizens and aliens alike,'' Judge Stephen Reinhardt wrote for the majority.
"We cannot simply accept the government's position,'' Reinhardt continued, "that the Executive Branch possesses the unchecked authority to imprison indefinitely any persons, foreign citizens included, on territory under the sole jurisdiction and control of the United States, without permitting such prisoners recourse of any kind to any judicial forum, or even access to counsel, regardless of the length or manner of their confinement.''
The Supreme Court last month agreed to decide whether the Guantanamo detainees, picked up in Afghanistan and Pakistan, should have access to the courts. The justices agreed to hear that case after the U.S. Court of Appeals for the District of Columbia ruled that the prisoners had no rights to the American legal system.