After the longest court case in English legal history, Helen Steel and David Morris were also deprived of their freedom of expression by their 1997 conviction, the court said.
The pair - whose 1984 pamphlet accused the fast food giant of starving the Third World, destroying rainforests and selling unhealthy food - originally fought the British court case against McDonald's and lost.
Suing the government
The campaigners subsequently took the case to the European Court of Human Rights in Strasbourg, suing the British government under article 10 of the Human Rights Convention on freedom of expression.
Britain has now been ordered to pay a total of 35,000 euros ($45,400) to the pair and offer them a retrial. London will have three months to appeal the decision.
In its ruling, the court said the denial of state legal aid to the defendants, a part-time barmaid and an unemployed single father, had skewed the case from the start.
"The denial of legal aid to the applicants had deprived them of the opportunity to present their case effectively before the court and contributed to an unacceptable inequality of arms with McDonald's," it wrote.
Steel and Morris had mounted their own defence and own representation in the original case whilst McDonald's had its unlimited chequebook to hire barristers, solicitors and clerical staff.
Victory for activists
The ruling is also being hailed as groundbreaking by public campaigners of all issues, because the court declared there was "a strong public interest in enabling such groups and individuals outside the mainstream to contribute to the public debate". The original decision had rejected the idea the activists enjoyed the same freedom of expression as journalists.
"The denial of legal aid to the applicants had deprived them of the opportunity to present their case effectively"
European Court of Human Rights ruling
The original "McLibel" trial was the longest in English legal history, running for 313 days of testimony, eight weeks of closing speeches and six months of deliberation.
The case dates back to the mid 1980s when fast food industries first came under the radar of activists targeting ''unhealthy'' fast food.
The case is thought to have cost Mcdonald's -the biggest restaurant chain in the world - £10 million.