Three judges allowed an appeal by Camden and Islington health authority against a High Court decision that Christopher Clunis was entitled to sue.
The ruling also blocks a damages action brought by Zito's widow, Jayne, against Clunis with a view to his including her compensation in his claim against the authority.
Lawyers for Clunis may still petition the law lords for leave to appeal against the decision.
Clunis was detained indefinitely in Rampton hospital in 1993 after admitting stabbing Zito to death at Finsbury Park Tube station.
Lord Justice Beldam, sitting with Lord Justice Potter and Mrs Justice Bracewell, held that it would not be fair or reasonable to hold the authority liable to Clunis for the consequences of his crime.Reuse content