The ruling allows the government to continue its imprisonment of Jose Padilla, who has been deemed an enemy combatant by the government and has been held without charges for more than three years, despite being an American citizen.
"The exceedingly important question before us is whether the president of the United States possesses the authority to detain militarily a citizen of this country who is closely associated with al-Qaida," wrote appeals Judge J. Michael Luttig for the three-judge panel in Richmond, Va.
"We conclude that the president does possess such authority," wrote Luttig, a conservative being considered for a possible Supreme Court nomination.
Luttig said Congress granted President Bush the power to detain Padilla in the joint resolution it passed authorizing military force after the Sept. 11, 2001 terrorist attacks.
The ruling overturns the February decision of a federal judge in South Carolina who found that Padilla must be released if not charged with a crime.
U.S. officials arrested Padilla at Chicago's O'Hare International Airport in 2002 after he returned from Pakistan, where the Bush administration said he met with al-Qaida to discuss setting off a radioactive "dirty bomb" in the United States.
The decision can now be appealed to the full appeals court or to the Supreme Court.