The judge, in May, had ruled that the plaintiffs had shown a tenuous link between Iraq and Osama bin Laden.
Still on Thursday he upheld the US government’s argument that only it had the power to seize the money under an executive order signed in March.
Despite ruling in the government’s favour, Judge Baer questioned whether the money should not instead go to the victims families before being used in Iraq.
“The government contends that these funds, which might otherwise be used for compensation, are needed to rebuild Iraq,” Baer said, according to Reuters.
“That need is clear, nonetheless one wonders whether American families who lost loved ones as a result of terrorism here and abroad ought not be compensated first,” he added.
After Baer’s ruling in May the plaintiffs were entitled to damages. They sued for access to the frozen funds.
Baer's acceptance that there was some proven link between Saddam Hussein’s government and al-Qaida was the first time a US Judge had supported such a hypothesis.
The US government, though alleging such a link, has been unable to prove any connection between the two.
"One wonders whether American families who lost loved ones as a result of terrorism here and abroad ought not be compensated first."
Former CIA Director R. James Woolsey and Laurie Mylorie, an expert on Iraq and terrorism, both testified on behalf of the plaintiffs.
Woolsey, an arch neo-conservative, played a role in planning both the first and the second gulf war and is a founding member of the Washington think tank, Project for a New American Century.
In 2000, PNAC published a document advocating war against Iraq, not only for its alleged “terrorist links” but for the strategic advantage such a war would deliver.
The plaintiffs included the widow of Timothy Soulas, a senior managing director and partner at Cantor Fitzgerald Securities, and the family members of George Smith, an analyst for SunGard Asset Management. Both were killed when the hijacked jets flew into the World Trade Centre in 2001.