The EU had justified its decision to disregard the British court judgment by arguing that the government there had initially considered appealing against the ruling.
But the Luxembourg court said that this was "not sufficient".
The British interior minister had since been denied the right to appeal against the decision on the grounds that "none of the arguments put forward stood a reasonable chance of succeeding," the EU court said.
However, the group remains on the current version of the EU blacklist for the time being since it is updated only every six months and Thursday's court ruling refers to an EU decision in December 2007, not the current list.
The European Council of member states placed the Iranian opposition group on its latest list in July, citing "new information" on the group, which has not been made public.
|The Luxembourg court handed down a similar ruling on the group in December 2006 [EPA]
The Luxembourg court handed down a similar ruling on the group in December 2006, and the latest verdict is likely to increase pressure on the EU to heed the court and keep the PMOI name off future lists.
Founded in 1965 with the aim of replacing first the Shah and then the clerical regime in Iran, PMOI has in the past operated an underground army in Iran with several thousand members.
It was the armed wing of the France-based National Council of Resistance of Iran (NCRI), but renounced violence in June 2001.
Maryam Rajavi, the president elect of the NCRI, hailed the latest court ruling as a "victory".
Rajavi, who lives in France, said the decision proved that the EU's "insistence on keeping the PMOI on this list has no legal or judicial base".
The EU's position was just "a concession made to the mullahs [in Tehran] which allows them to maintain their religious dictatorship," she said.