Palestine Action, which had increasingly targeted Israel-linked defence companies in the United Kingdom, with a particular focus on Israel's largest defence firm Elbit Systems, was proscribed under terrorism laws last year.
London's High Court ruled in February, after a legal challenge by the group's co-founder, that the ban unlawfully interfered with freedom of expression although it remained proscribed pending the government's appeal.
Huda Ammori, who co-founded Palestine Action in 2020, had said proscription had imposed "severe restrictions on the fundamental free speech and assembly rights of vast numbers of people" who supported the Palestinian cause.
However, five senior judges on the Court of Appeal overturned the lower court's decision, saying while banning a group like Palestine Action was "highly controversial," it was proportionate.
The judges said they rejected the argument that Palestine Action followed in the footsteps of protesters such as the suffragettes or the campaigns against apartheid and the Iraq war.
"It is a fundamental mistake to overlook the fact that Palestine Action overtly promoted unlawful violence amounting to terrorism," said Lady Chief Justice Sue Carr, the most senior judge in England and Wales.
"It is not a direct action civil disobedience protest group operating transparently in the open. It is a covert organisation which avoids the detection and prosecution of those using violence to destroy property and cause injury."
Ammori said she would seek to challenge Monday's ruling at the UK Supreme Court.
"We will fight this all the way," she said.
"We will not stop fighting to overturn one of the most extreme attacks on free speech and the right to protest in modern British history."
UK interior minister Shabana Mahmood said the decision did not affect lawful protest in support of the Palestinian cause.
"There is a difference between supporting Palestine and supporting a proscribed terrorist group," she said.
Police officers detained some of the demonstrators opposing the government's decision to ban Palestine Action during a protest outside the court on Monday.
Palestine Action was proscribed last July, having often targeted Israel-linked defence companies or other firms with links to them in the UK with "direct action," often blocking entrances or spraying red paint.
Carr said its main target was Elbit but included any other company which allowed the Israeli firm to conduct business in the UK with the intent of closing down its operations by intimidation and not persuasion.
The group was banned shortly after a June break-in at the Royal Air Force's Brize Norton base, in which activists damaged two military planes.
That placed the group on a par with Islamic State or al-Qaeda, making membership a criminal offence punishable by up to 14 years in prison.
More than 2700 people have since been arrested for holding signs in support of Palestine Action.
The ruling comes after four people were jailed for criminal damage relating to a 2024 raid on an Elbit factory in southern England.
One of the defendants was also found guilty of hitting a police officer with a sledgehammer.
As they were being sentenced at Woolwich Crown Court on Friday, police arrested more than 100 people outside for showing support for Palestine Action.
