The Court of Justice of the European Union ordered the Council of European Union to annul the sanctions imposed on the Sri Lankan group and said their assets should remain frozen "temporarily", according to a statement issued by the court.
The court annulled specific restrictive measures directed against certain persons and entities by the EU with its view of combating terrorism.
The EU had declared the Liberation Tigers of Tamil Eelam (LTTE) a terrorist outfit in 2006, following the earlier proscriptions of the USA and Canada. The ban criminalises any activity that could be connected to the LTTE.
The court said the declaration of the LTTE as a terrorist organisation in 2006 was based on "imputations derived from the press and the Internet", the statement said.
The court observed that the "Indian authorities cannot be regarded as a reliable source of information since they have adopted a 'biased position' in the conflict between the LTTE and the Government of Sri-Lanka."
It said in a statement that the LTTE is wrong to claim that, in international law, the notions of armed conflict and of terrorism are incompatible. In addition, the court ordered the Council to pay its own costs and the costs of the LTTE.
The Netherlands, the UK and the European Commission were ordered to bear their own respective costs. The court found the current restrictions implemented by the EU inappropriate and gave the now 28-member EU two months to come out with a new restrictive measure against the LTTE, if appropriate.
The court decision will come to effect after three months.
The European Court of Justice is the highest court in the EU in matters of European Union law. The LTTE was engaged in an "armed conflict" with Sri Lankan government forces for nearly-three decade, but were defeated in 2009 following the death of its chief Velupillai Prabhakaran.