The ruling on Thursday upheld an earlier decision that European sugar exporters are getting more in government handouts than is allowed under trade rules.
The WTO appellate body upheld a 2004 decision by a WTO panel, which said that EU subsidies were bringing down the price of sugar on the world market and making it impossible for producers in other countries to compete.
"We had hoped the appellate body would take account of our arguments," said EU agriculture spokesman Michael Mann.
"Of course, we will comply with the ruling," he said.
"We are already planning a far reaching reform of our sugar regime," he added, saying changes that needed to be made because of the ruling would be written into the reform proposal before it is released on 22 June.
Developing world sugar farmers
will benefit from the ruling
Brazil, Australia and Thailand, all major sugar producers, made the original complaints. Thursday's ruling is final and cannot be appealed.
"This results today means an important victory for us," said Luiz Felipe de Seixas de Correa, Brazil's ambassador to the WTO.
"This sugar decision is a historical decision that certainly is going to help to inclusion of agriculture in the multilateral trade system."
The decision is important for Brazil, the world's largest sugar producer, because "it will force the EU to reduce subsidies", said Roberto Azevedo, a top trade official with the country's Foreign Ministry.
Azevedo also predicted the decision would help Brazil grab a larger share of the world's sugar market.
"The writing has been on the wall for ages, but the EU has been refusing to read it"
Oxfam's Phil Bloomer
The EU will have to "significantly reduce its sugar exports", said Australia's Trade Minister Mark Vaile.
British aid group Oxfam said the ruling confirmed that the EU had been breaking international trade law and harming developing countries' economies.
"The writing has been on the wall for ages, but the EU has been refusing to read it," said Oxfam's Phil Bloomer.
EU sugar prices are more than four times higher than the global market rate and are protected by massive import tariffs.