High Court ruled on Thursday that the government requires parliamentary approval to trigger the process of exiting the European Union, complicating Prime Minister Theresa May's Brexit plans.
The government said it would appeal against the decision and Britain's Supreme Court has set aside Dec. 5-8 to deal with the matter.
Sterling rose on the news, with many investors taking the view that lawmakers would temper the government's policies and make an economically disruptive "hard Brexit" less likely.
"The most fundamental rule of the UK's constitution is that parliament is sovereign and can make and unmake any law it chooses," said Lord Chief Justice John Thomas, reading out the ruling.
May's government said in a statement it was disappointed by the court's judgment.
"The country voted to leave the European Union in a referendum approved by Act of Parliament. And the government is determined to respect the result of the referendum," it said.
In theory, parliament could block Brexit altogether. But few people expect that outcome, given that the British people voted by 52 to 48 percent to leave the EU in a referendum in June.
However, the ruling makes the already daunting task of taking Britain out of a club it joined 43 years ago even more complex. It also puts at risk May's own deadline of starting formal negotiations on the terms of Brexit by the end of March.
The High Court, made up of three of Britain's most senior judges, ruled that the government could not trigger Article 50 of the EU's Lisbon Treaty, the formal step needed to start the process of exiting the bloc, without approval from parliament.
"The court does not accept the argument put forward by the government," Thomas said.
"For the reasons set out in the judgment, we decide that the government does not have power ... to give notice pursuant to Article 50 for the UK to withdraw from the European Union."
Lawmakers largely voted to remain in the EU in the June referendum. Many investors believe greater parliamentary involvement in the process would therefore reduce the influence of ministers in May's government who are strongly pro-Brexit.
This could reduce the likelihood of a "hard Brexit", a scenario in which Britain prioritises tight controls on immigration over remaining in the European single market.
Nigel Farage, head of the anti-EU party UKIP, said on Twitter that he feared the ruling could turn into an attempt to scupper Brexit altogether.
"I worry that a betrayal may be near at hand," he said.
"I now fear every attempt will be made to block or delay triggering Article 50. They have no idea (of the) level of public anger they will provoke."
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