The Court of Appeal today delivered a further blow to the Government's controversial policy of placing terror suspects under house arrest using control orders.

Three senior judges rejected a challenge by John Reid, the Home Secretary, against an earlier High Court ruling that the orders contravened the Human Rights Act.

In a move which marks the latest clash between ministers and judges over civil rights, Mr Reid responded furiously to the judgment and vowed to petition the House of Lords to get it overturned, claiming that control orders made up an "essential" part in the War on Terror.

Dismissing the Home Secretary's appeal, the panel, headed by the Lord Chief Justice, Lord Phillips, said: "We agree that the facts of this case fall clearly on the wrong side of the dividing line. The orders amounted to a deprivation of liberty contrary to Article 5.

"We consider that the reasons given by Mr Justice Sullivan for quashing the orders are compelling."

The orders, used to monitor and restrict the activities of six Iraqi terror suspects who were obliged to remain indoors for 18 hours per day, were last month ruled to be in breach of their human rights because they "deprived them of their liberty". This led to Mr Reid's appeal.

But, despite the defeat over the six suspected terrorists, in a minor victory for Mr Reid the Court of Appeal did allow the Home Secretary's appeal against a decision that a seventh "controlee" had suffered a breach of his human rights because he had not been given a fair hearing before the control order was imposed on him.

Mr Reid was not given permission to appeal, so his only avenue is to petition the House of Lords - and it is up to the law lords as to whether they choose to take the matter any further.

In the meantime, the Home Secretary has been forced to relax the existing control orders on the six suspected Iraqi terrorists.

"I intend to appeal against today's judgment dealing with deprivation of liberty not least because I am concerned about its effects on public safety," Mr Reid said.

"We are at a sustained high level of threat from a terrorist attack - put simply, an attack is highly likely. Our security services are at full stretch and control orders form an essential part of our fight against terrorism.

"I have therefore instructed that we take all necessary steps to appeal the judgment to the House of Lords.

"I have made new, amended, control orders today against these six suspected terrorists - reluctantly amended, because these are not as stringent as the security services believe are necessary, but are required to maintain protection of the public to the best of our ability in this situation."

The Government introduced control orders under the Prevention of Terrorism Act 2005 to force a curfew on terror suspects who could not be prosecuted in courts. This could be because the evidence against them has been collected by bugging the suspect - and is therefore inadmissible - or because using it could reveal intelligence sources.

The Iraqi men, who cannot be identified, are all single Iraqi nationals whose claims for asylum have been dealt with or have yet to be determined.

They were arrested under anti-terrorism laws but - despite being released without charge - control orders were then made against them.

Under the orders, one was allowed to live in his own home but the others were required to live at designated addresses away from their home areas. They were obliged to remain indoors for 18 hours a day, between 4pm and 10am, and were subject to other severe restrictions.

Mr Justice Sullivan last month ruled the restrictions were so severe that the men were "rather like prisoners in a cell" with their liberty "non-existent for all practical purposes".

In April, the same judge found the 2005 Prevention of Terrorism Act - under which control orders are made - was incompatible with the ECHR because another "controlee" had not received a fair hearing. Mr Reid's counsel, Philip Sales, has argued in court that there was "no deprivation of liberty".

David Davis, the Shadow Home Secretary, claimed the latest crisis was of the Government's own making.

"Today we see that, yet again, the Government’s failure and incompetence has put the safety of British people at risk," Mr Davis said.

"When the Government’s last set of anti-terror measures collapsed as a result of their incompetence in dealing with their own Human Rights Act, we offered them an extension of those laws to allow time to come up with workable, robust effective new laws. They turned us down."

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