The 9th U.S. Circuit Court of Appeals said Monday that the government approved the so-called Darroch-Eagle timber sale near Yellowstone National Park although it violates local rules limiting the amount of miles of logging roads.
Also, the San Francisco-based court said the government did not adequately review the plight of grizzlies, which are listed as threatened under the Endangered Species Act.
The court's action blocks any logging until new environmental studies are conducted.
The ruling is being watched closely in Montana and other western states in which logging, mining and other natural resources are a significant part of the economy.
"Our goal was to prevent destruction of grizzly bear habitat. Looks like we've succeeded," said John Amsden, an attorney for environmental groups who sued.
Katherine Barton, who argued the case for the Justice Department, declined comment.
The Darroch-Eagle timber sale is one of 11 planned by the U.S. Forest Service to provide funding to acquire about 55,000 acres of privately held land within the Gallatin National Forest.
President Bush recently added his voice to the national debate on logging policy, coming down on the side of those who argue that the right kind of logging is wise management of the land which would prevent large-scale fires.