The program has been criticized as a backdoor draft by some lawmakers, including Democrat Sen. John Kerry, who lost in Tuesday's presidential elections to George W. Bush.
U.S. District Judge Frank Damrell Jr. refused to grant an injunction stopping the soldier's transfer to Iraq later this month because his California National Guard enlistment does not expire until May. However, if the soldier prevails in his challenge, he can be returned home by court order, the judge said Friday.
The "stop-loss" program extends enlistment during war or national emergencies. It could keep tens of thousands of personnel in the military beyond their expected time of service.
The Army National Guardsman, identified only as John Doe to prevent harassment or reprisal against him or his family, argues that the policy doesn't apply to the National Guard.
His lawyers said the provision can legally be used only when Congress declares war, and not in Iraq.
"He's being deprived of his liberty under an order he charged as unlawful," attorney Joshua Sondheimer said Saturday.
Justice Department attorney Matthew Lepore defended the policy, saying it was authorized by an emergency executive order signed by Bush three days after the Sept. 11, 2001, terrorist attacks.
The Sacramento-based soldier is an eight-year veteran with combat experience who is married with two children. Court papers said the soldier's family faces financial hardship because of his extended absence from his civilian job.
He signed up under a National Guard program for veterans that offers military education and family medical benefits for a one-year trial. Before that term expired, he was called up for an 18-month tour that will extend his enlistment by nearly a year.
At least two other veterans have filed suit against the government for orders that would send them to Iraq.
This past week, the Army agreed to honorably discharge Capt. Jay Ferriola, who was told to go to Iraq even though he had notified the Army he was resigning. The Army also granted an administrative delay to David Miyasato, who filed a lawsuit challenging orders to report for duty eight years after he left the reserves.