In a blow to the legal strategy pioneered in the wake of the September 11 attacks in 2001, the high court ruled President George W Bush had no authority to order such tribunals, which it said contravened the Geneva Conventions.
In a 5-3 vote, the high court warned the administration had no "blank check" to decide how to try terror suspects, as it reversed an appeals court ruling on a tribunal for Osama bin Laden's former driver Salim Ahmed Hamdan.
But the White House and other administration officials quickly signalled they would try to consult with Congress to refine rules for such commissions, in line with the landmark Supreme Court judgement.
They also stressed the decision did not mean Guantanamo would quickly shut down.
"Nobody gets a 'get out of jail free,' card," said White House spokesman Tony Snow.
The Senate Armed Services Committee, meanwhile, said it would hold a series of hearings on what to do next, to prepare the way for possible legislation in September.
Committee Chairman Senator John Warner said he would make the issue a "top priority."
Justices suggest remodelled tribunal
The idea that Mr Bush could ask Congress to approve a remodelled tribunal set-up was first mooted by Supreme Court justices themselves, in a concurring document to the court's main opinion written by Justice John Paul Stevens.
"Nothing prevents the president from returning to Congress to seek the authority he believes necessary," wrote Justices Breyer, Kennedy, Souter and Ginsburg.
A senior official argued that the court had "emphasised these problems can be cured and invited the president and Congress to do just that."
The test case was brought about by Guantanamo Bay inmate, Salim Hamdan, a Yemeni national accused of being al-Qaeda leader Osama bin Laden's bodyguard and personal driver.
Hamdan's attorney, Lieutenant Commander Charles Swift, said the ruling meant his client would now get a fair trial.
In the court opinion, Justice John Paul Stevens wrote: "The rules specified for Hamdan's trial are illegal.”
But one of the Supreme Court justices who disagreed with the court's ruling, Clarence Thomas, took the unusual step of reading his opinion from the bench, saying it "flouts our well established duty to respect the executive's judgment in matters of military operations and foreign affairs.
He warned that the majority ruling meant that terrorists needed to be caught "red handed" before they could be tried under the laws of war.
War on terror not undermined
A concurring opinion signed by Justice's Breyer, Kennedy, Souter and Ginsburg, rejected claims the decision would undermine the "war on terror."
Mr Bush received the news of the crucial Supreme Court decision while he was meeting with Japanese Prime Minister Junichiro Koizumi at the White House.
He said the ruling would not set any suspected terrorists free and that he still hoped to try them in military courts.
"We will analyse the decision. To the extent that the Congress is given any latitude to develop a way forward using military tribunals, we will work with them. I want to find a way forward."
Mr Bush has argued that he did not need to consult Congress on the tribunals because they were permitted under a congressional resolution authorizing him to use military force after the September 11 attacks.
Hicks' lawyer
The lawyer for David Hicks, the only Australian held at the Guantanamo Bay US prison, said he hoped the ruling would help speed his client's release.
“It’s great news," US Marine Corps Major Michael Mori said. "It is what everybody else has been saying all along - that the military commission system does not provide the basic fundamental protection that is required."
"Every legal organization in the world has criticized the military commissions," he said. "In fact, Australia is the only country that has accepted the military commissions for its citizens."
Hicks, 34, was the first Guantanamo detainee scheduled to face trial by the controversial military tribunals created after the September 11, 2001 attacks to try "war on terror" suspects.
A convert to Islam who was captured in Afghanistan in late 2001, he faces charges of conspiracy to commit war crimes, attempted murder by an unprivileged belligerent and aiding the enemy.
The Supreme Court verdict opens up the prospect of him facing trial in a more conventional US court, either by military court martial or in a civilian court.
International reaction
Secretary General of the Council of Europe, Terry Davis, welcomed the ruling, saying: "This is a victory for justice in the campaign against error, ineptitude and hypocrisy.”
"The fallacious choice between security and the rule of law and the deliberate decision of the United States government to betray fundamental human rights and liberties have weakened American defences, alienated its allies and galvanised its enemies in the war against terrorism".
The New York-based Center for Constitutional Rights, which has spearheaded numerous challenges on behalf of Guantanamo detainees, trumpeted a victory for the rule of law, the Geneva Convention and the US constitution.
Human Rights Watch welcomed what it described as the repudiation of a system that failed to meet basic standards for a fair trial and which had proved a public relations "disaster" for the United States.
.