Without that legal basis, the government might have to scrap its new plans to introduce a house arrest system for security suspects.

And in a further blow to its anti-terrorism policy - in turmoil since the country's top court ruled against it two months ago - the government lost a bid on Monday to send an Algerian terrorism suspect back to jail.

Britain, alone among European nations, declared an emergency after the 11 September 2001 attacks on the United States, allowing it to suspend the European Convention on Human Rights guarantee to a fair trial and to jail foreigners without charge.

Emergency

Since the legal setback, however, the government has said it wants to introduce a system of house arrest, which would apply to British citizens as well as foreigners. Rights groups say the new plan is even more draconian than the old one.

The European community considers the laws a "clear breach and Britain should change its legislation accordingly"

Lawyer Gareth Peirce

Lawyers said they would seek to have the European Court of Human Rights in Strasbourg rule that there is no national terrorism emergency, which could wreck the government's basis for its planned new powers.

"There has been much commentary from the body of the European community about the state of these laws," Gareth Peirce, lawyer for most detainees held under the system, told Reuters. "They are, in their view, in clear breach and Britain should change its legislation accordingly."

A spokesman for rights group Liberty, which has joined the case, said: "Without the derogation (opt out from the convention), it will make it very difficult if not impossible for the new measures to be introduced."

Setback for government

Seventeen foreigners have been held under the emergency powers, 10 of whom are still jailed indefinitely.

The government tried on Monday to return an Algerian known only as "G" to jail, arguing he had violated the terms of a bail order imposed when he was freed on health grounds last year.

But the Special Immigration Appeals Commission ruled that the government had failed to prove G broke his bail conditions by meeting two people without permission.

"Grave suspicion is insufficient to prove there was a breach," Justice Collins said.

Under his bail, G has been electronically tagged, can only leave home with a police escort, is forbidden from having contact with anyone except his family and lawyers, and cannot use a cellphone or computer.

The bail terms given to G could be a template for the new house-arrest system.