The Court of Appeal ruling sharply criticized the government's handling of the case of Lotfi Raissi, who was held for nearly five months in a high-security prison until a British judge refused to order his extradition.
Raissi, 34, said he now hoped for an apology from the British government.
"After a miscarriage of justice, I am now completely exonerated. I am very glad," Raissi told reporters outside the court.
The Justice Ministry said it was considering whether to appeal the ruling, which reversed a High Court decision delivered a year ago that Raissi was not entitled to compensation within the normal British criminal process because he had been held on a U.S. extradition warrant.
While the Court of Appeal cannot order compensation, the ruling indicates its belief that Raissi is entitled to it.
Raissi was arrested near London 10 days after the 2001 attacks in New York City and Washington. He was indicted by a U.S. federal grand jury in the state of Arizona for allegedly offering pilot training to the hijackers.
"Now ... I will ask the home secretary to provide me with a widely publicized apology for the part that they played in destroying my life and my career, and destroying the name of my family," Raissi said.