The government has vowed to appeal after a High Court judge ruled the Brexit process cannot be started until Parliament has given its backing.
The ruling, handed out today, means Theresa May cannot trigger Article 50 without approval from MPs.
A spokesman said the government was "disappointed" by the judgement.
"The country voted to leave the European Union in a referendum approved by Act of Parliament. And the Government is determined to respect the result of the referendum. We will appeal this judgement."
The news caused sterling to jump against the dollar, nudging above $1.24 for the first time in days before falling back slightly to $1.2384.
The case was brought in the aftermath of the EU referendum to determine whether an Act of Parliament needs to be put in place before government triggers Article 50, or whether government has the prerogative to start the UK’s EU withdrawal process by itself.
The case has been brought to court by a number of parties, but the lead claimant is fund boss Gina Miller. On the steps of the High Court this morning, she said:
This result today is about all of us: our United Kingdom and our futures. It is not about how any of us voted – each of us voted to do what we believed was the right thing for our country.
This case is about process, not politics. My dedicated legal team – Mishcon de Reya and counsel – are, alongside myself and my supporters, pleased to have played our part in helping form a debate on whether the rights conferred on UK citizens through Parliament legislation 44 years ago could be casually snuffed out by the Executive without Parliament or our elected representatives and without proper prior consultation about the Government's intentions for Brexit.
However you voted on 23rd June, we all owe it to our country to uphold the highest standards of transparency and democratic accountability that we are admired and respected for around the world.
She is represented by solicitors Mishcon de Reya as well as Lord Pannick QC and Tom Hickman of Blackstone Chambers, Rhodri Thompson QC of Matrix Chambers and Anneli Howard of Monckton Chambers.
Meanwhile, David Greene, senior partner of Edwin Coe, which acted for another claimant, Deir Santos, said:
Today some of England's most senior judges have ruled that Parliament must be involved in this critical decision for the nation. Our Parliamentary democracy has been reaffirmed and now very much needs to show it is alive and kicking.
The government is represented by Attorney General Jeremy Wright QC, James Eadie QC, Jason Coppel QC, Tom Cross and Christopher Knight.
A leapfrog process has already been set up to allow any appeal to skip over the Court of Appeal and directly to the Supreme Court for a hearing in December - long before the March 2017 deadline Prime Minister Theresa May has given for starting the Article 50 process.
May recently announced MPs will be offered a series of high-level debates on leaving the EU, but stopped short of granting the full Act of Parliament Miller and her team have argued for.
The case was heard across three days in October.
Article 50 ruling: What you need to know