Terry Perkins, 28, was a Royal Navy leading medical assistant with exemplary service until his discharge in October 1995 following a tip-off about his sexuality.
His case reopens the controversy over whether gays can be lawfully barred from the services, even though the House of Lords has upheld the Ministry of Defence's right to enforce the ban and the Commons Defence Select Committee has recommended the policy should stay.
A recent landmark judgment by the European court could have changed all that, however, and Mr Perkins' case could pave the way for the ban to be scrapped and for awards of unfair dismissal compensation in another 30 pending complaints and a host of past cases.
The Luxembourg judges ruled that transsexuals were entitled to protection from discrimination under the EU Equal Treatment Directive, and that the directive should be given a broad interpretation. It is a key employment protection measure that is directly enforceable in industrial tribunals against British employers once the European court has ruled it covers their circumstances.
When giving leave to Mr Perkins to bring a judicial review in July, Mr Justice Sedley said: "It is arguable that sexual orientation discrimination is caught by the Equal Treatment Directive."
Mr Perkins, who worked at the Royal Naval Hospital, Gosport, Hampshire, before his dismissal, wants the court to refer his case directly to the Luxembourg court for guidance, after which it would return to the UK for a final ruling and the assessment of compensation.
He revealed that he was gay in an interview with the special investigations branch in August 1995 and was sacked two months later because homosexuality was "inconsistent with service in the armed forces".
A further case raising the issue will be launched tomorrow by Ian Farmer, a former army intelligence sergeant, who was discharged last year. His case is expected to be put on hold until Mr Perkins' complaint has been resolved.
There are fears in Whitehall that a ruling in favour of Mr Perkins could open the floodgates. But Duncan Lustig-Prean, chairman of Rank Outsiders, the campaign to change the policy, said: "The MoD have had their warning. We are going to use all the battlefronts we can."
Mr Lustig-Prean is one of the four sacked gay service personnel who lost their cases before the law lords. Their cases are due to be heard by the European Commission on Human Rights in Strasbourg.
Mr Lustig-Prean, 37, a former Royal Navy lieutenant commander, said: "Hardly a day passes without an horrific account of racial abuse, sexual harassment and barbaric initiations. This outdated and bigoted policy panders to such prejudice. It is a cancer which the Government and the MoD must excise now."
Ministers have been warned of a potentially massive compensation bill if Mr Perkins wins. Confidential ministerial briefings leaked last year said that if the Equal Treatment Directive was held to apply, compensation for the thousands of homosexuals discharged since 1978 would be "very substantial".Reuse content