The three-judge panel said Congress had not authorized Padilla's detention and that President Bush could not therefore hold him. Padilla, who has been held in a naval prison in Charleston, S.C., according to Associated Press reports, could instead be tried in a civilian court.
"As this court sits only a short distance from where the World Trade Center stood, we are as keenly aware as anyone of the threat al-Qaida poses to our country and of the responsibilities the president and law enforcement officials bear for protecting the nation," the court said in its two-to-one ruling.
"But presidential authority does not exist in a vacuum, and this case involves not whether those responsibilities should be aggressively pursued, but whether the president is obligated, in the circumstances presented here, to share them with Congress," the court continued
The FBI arrested 31-year-old Padilla in May 2002 as he arrived from Pakistan at Chicago's O'Hare Airport. He was accused of plotting to detonate a "dirty bomb," an explosive device made with dynamite with the intent of spreading radioactive material.
Defense Department spokesman Mark Corallo said the agency was reviewing the decision and had not decided whether to appeal the ruling.
Padilla, who changed his name to Abdullah al Muhajir and is an Islamic convert, also is accused of collaborating with the al-Qaida terrorist network.
"He researched nuclear weapons and received training in wiring explosives while in Pakistan, and he was instructed to return to the United States to conduct reconnaissance operations for al-Qaida," said Deputy Defense Secretary Paul Wolfowitz after his arrest.
Since May, officials have held Padilla, first in New York then in South Carolina, and have denied him access to an attorney or trial. Authorities have also not formally charged him with any crime.
Padilla's lawyers have tried to gain access to their client, but federal prosecutors have argued that Padilla poses a threat to national security and that giving him access to lawyers could interfere with his interrogation.
Opponents of the handling of the Padilla case hailed Thursday's decision. New York Civil Liberties Union attorney Chris Dunn called it "historic."
"It's a repudiation of the Bush administration's attempt to close the federal courts to those accused of terrorism," he said.
In it's ruling, the U.S. Second Circuit Court of Appeals, did not address the cases of two other detainees also categorized as "enemy combatants -- Qatar citizen Ali Saleh Kahlah Al-Marri, accused of being an al-Qaida sleeper agent, and Yaser Esam Hamdi, born in Louisiana but living in Saudi Arabia and caught fighting with the Taliban in Afghanistan. The court said it was addressing only the detention of U.S. citizens captured on U.S. soil.