Judge Justice Andrew Collins ruled in the high Court in London on Tuesday that the families should be given permission to argue that the European Convention on Human Rights applied to their cases.
"Permission means merely that the point is arguable," he said.
The Ministry of Defence has refused to accept responsibility for the deaths in Iraq, but the families' lawyers are demanding a judicial review to examine whether the killings were a violation of the victims' right to life under European law.
Lawyers argue that because the Iraq war had officially ended when the victims died, and because Britain was an occupying power, the European Convention on Human Rights should apply.
"The important thing to remember about these cases is firstly the war was over and we were occupying the country. And secondly, these people were going about their lawful business in their homes, or on their farms" when they died, said human rights lawyer Phil Shiner, who is representing the Iraqi families.
Shiner alleged British soldiers shot and killed them, and the British army refused to properly investigate the killings.
The legal battle, launched at the High Court in London, comes amid a separate political furore over photographs published in a tabloid newspaper which allegedly show an Iraqi prisoner being abused by British troops.
It also comes as human rights group Amnesty International issues a report claiming that British troops have killed Iraqi civilians who posed little or no threat. In many cases, the deaths were not investigated, Amnesty says.
It was not immediately clear if the cases cited by Amnesty overlapped with those before the High Court.
Britain joined the US-led war on Iraq in March last year. President George Bush declared the war over on 1 May 2003.