In a harshly-worded verdict, two High Court judges condemned as "repugnant" the British government's decision to "exile a whole population" from the idyllic Chagos Islands on the grounds of ensuring "peace, order and good government".
About 2,000 were shifted to nearby Mauritius and the Seychelles in the 1960s and early 1970s with little support or compensation where many struggled to make a living.
The decision in London was hailed by the leader of the Chagos Refugee Group, Olivier Bancoult, who said the Chagos families now hoped to go home soon after spending decades in exile, many of them in poverty.
"This is a very big historic moment," Mr Bancoult said.
The displacement allowed Britain to lease the largest island, Diego Garcia, to Washington for 50 years.
The US air base on Diego Garcia is a major platform for military operations in Iraq and Afghanistan, and media reports have alleged that it is used to house terror suspects in secret.
The court, however, in its verdict on a case heard in December, granted the government permission to appeal against the ruling.
Lawyers for the Chagossians had argued in court that, although they cannot live on the main island of Diego Garcia, they should be allowed to return to the other 64 islands of the Chagos Archipelago.
Long campaign
The decision caps an exhausting campaign for many of the Islanders who were granted a British passport as a concession in the move.
Hundreds came to England seeking a better life and justice in a battle which saw some camping out on the streets at the gates of parliament in protest.
The Chagossians thought they had won the right to return to the British overseas territory after a High Court victory in 2000.
The court ruled that a 1971 Immigration Ordinance banning people without permits from entering or remaining there was unlawful.
But the government used the royal prerogative in 2004 to introduce a
little-used power, called the Order in Council, which continued the islanders' state of exile.
The order was issued through the so-called Privy Council - a body of
senior advisors, including government ministers, to Queen Elizabeth II - rather than by parliament.
Mr Bancoult's lawyer Sydney Kentridge argued in December that while the queen had a general power to legislate for the British Indian Ocean Territory (BIOT) - the colony comprising the Chagos Islands - she could not use the royal prerogative "to remove or exclude British citizens from the territory to which they belong".
Her powers were limited to making laws "for the peace, order and good governance of the territory," he said.
His argument held sway on Thursday (local time) when the judges ruled that the interests of the islanders from the BIOT had been ignored and that orders made under the royal prerogative to prevent their return were irrational and unlawful.
Between 1965 and 1973, the local people, known as Ilois, who mainly worked on coconut plantations, were forced to leave.
Most of the islanders went to Mauritius after being forced off their homeland, but over the years families found it hard to settle and became impoverished, with several individuals committing suicide.
Only about 850 island-born natives are still alive in Mauritius and the
Seychelles, but their descendants now number about 7,000.
Some 1,700 US military and 1,500 civilian contractors live on Diego Garcia as well as 50 British officials, according to advocacy groups Chagos Support Association and Minority Rights Group International.
A US federal court ruled last month it had no authority to order compensation to those evicted.
The courts "lack jurisdiction over political decisions that are, by their
nature, 'committed to the political branches to the exclusion of the
judiciary,'" the ruling said.
It added that the case "involves topics that serve as the quintessential sources of political questions: national security and foreign relations."
Also last month some 100 Chagossians were allowed to make a brief return to three of the islands, Diego Garcia, Peros Banos and Salomon, for humanitarian reasons.