Britain's Supreme Court on Wednesday quashed government sanctions that had been imposed on Bank Mellat, Iran's largest private bank, due to its alleged links to Tehran's disputed nuclear programme.
The judges found the 2009 Treasury directive was "irrational" and "disproportionate". "I conclude that that it was unlawful," judge Jonathan Sumption wrote in a majority ruling.
The Treasury said it was disappointed but noted the order had been superceded by an European Union asset freeze on the bank, which remained in place.
"We are disappointed that the Court of Appeal's decision in favour of Her Majesty's Treasury was overturned and are considering the judgement and its implications for any future orders," a spokeswoman said.
But she added: "It does not affect the way in which we currently apply financial restrictions to Iran and will not affect the EU asset freeze which remains in place against Bank Mellat.
"As set out in the judgement, the Treasury maintains the power to make future orders under Schedule 7 to the Counter-Terrorism Act 2008. Sanctions will remain in place until Iran engages in meaningful talks on its nuclear programme."
However, Sarosh Zaiwalla, senior partner at Zaiwalla and Co Solicitors which represented the bank, said the ruling raised hopes of a lifting of EU sanctions.
"The UK government, which had originally proposed to the EU Council to list Bank Mellat, will now be compelled to respect this finding of the Supreme Court and ask the EU Council to withdraw the sanctions listing against the bank," he said.
The bloc's General Court in January annulled the EU sanction against Bank Mellat but an appeal is pending.
The asset freeze is part of a number of sanctions imposed by the international community on Iran over its nuclear programme.
Tehran says it is purely for civilian energy purposes but the West and Israel accuse the Islamic republic of seeking a nuclear bomb.
The Supreme Court judges heard the appeal against the Treasury order in secret, a highly controversial move in Britain.
The decision to hold a closed hearing was upheld in a linked ruling on Wednesday, although four of the nine judges dissented, saying there had not been sufficient reason to exclude the public.