The decision to end anti-fraud investigations into dealings between BAE Systems and Saudi Arabia will be subject to a judicial review in 2008.
The development comes after two pressure groups won their high court challenge questioning the legality of the government's action last year.
Then prime minister Tony Blair told the Serious Fraud Office in 2006 to drop a probe into allegations of corruption in BAE dealings with Riyadh in the 1980s.
Attorney general Lord Goldsmith said at the time that it was a matter of national security.
But at the high court today, Lord Justice Moses and Mr Justice Irwin agreed with Corner House Research and Campaign Against Arms Trade (CAAT) that the decision "cries out for hearing".
The judges said the government's actions were "matters of concern and public importance… it is in everyone's interest that a full hearing take place".
BAE, which has denied all wrongdoing, had been accused of operating a slush fund in the multi-billion pound al-Yamamah arms deal with Saudi Arabia in 1985.
According to the allegations, the defence firm paid money directly to Saudi officials in order to secure the lucrative contracts.
Commenting on today's court decision, CAAT's Symon Hill said: "This is brilliant news for everyone who wants to see an end to arms companies' influence over government.
"We are now one step further today to the point when BAE Systems is no longer calling the shots."
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