Foreign Secretary Margaret Beckett took the case to the Court of Appeal after two High Court judges found for the Chagossians.

On Wednesday three judges, headed by the Master of the Rolls, Sir Anthony Clarke, dismissed the action.

Lord Justice Sedley, giving the lead ruling, said the method used by the Government to stop the islanders returning - making an Order in Council under the Royal Prerogative - was unlawful and an abuse of power by the Government executive.

Lord Justice Waller said the decision had been taken by a Government minister "acting without any constraint".

"Indeed, the Crown may be doing something that, if she only knew the true position, she would prefer not to do, and yet it is then said that the Government can hide behind the 'Crown's prerogative'."

But the Government was granted a stay on the court order won by the Chagossians pending an application to challenge the decision in the House of Lords.

Lawyers for the Foreign Secretary had argued at the appeal hearing in February that the case involved issues of "great constitutional importance".

The High Court judges condemned as "repugnant" the British Government's decision to "exile a whole population" from the Indian Ocean islands in the 1960s and 1970s.

The Government said the decision was made on the basis that it was necessary for peace, order and good government. But Lord Justice Hooper and Mr Justice Cresswell ruled that the interests of the islanders from the British Indian Ocean Territory (BIOT) had been ignored and that orders made under the the royal prerogative to prevent their return were irrational and unlawful.