The MoD has agreed to pay pounds 80,000 to a former member of the parachute regiment who lost his hearing at the height of a simulated battle on the Otterburn training ground in Northumberland.
The settlement has prompted the Royal British Legion to urge scores of other deafened servicemen to sue the MoD rather than apply for a disability pension.
Although another court judgment last year ruled that the MoD could not be culpable for deafness incurred by troops in battle, lawyers argue that in peace-time the ministry is subject to the same health and safety laws as any other employer. The compensation payment was made last month to James Nicholls, a former Lance Corporal with 2 Para, who specialised in "spotting" mortar fire from forward positions.
During an exercise in 1991 he was attempting to maintain radio contact with the mortar positions, while live ammunition was being fired around him. "It was impossible for me to wear my ear defenders and radio headphones at the same time. The mortar people were talking back to me but I couldn't hear them because I had been deafened," he said.
After the exercise, L/Cpl Nicholls was taken to the Cambridge Military Hospital in Aldershot, Hampshire, and the following August he was medically discharged as unfit for service. He now works as a lorry driver in Essex.
"I was devastated," he said. "I loved the Army and I was making a career out of it. There were only six people doing my job in the whole battalion."
Mr Nicholls, 36, now takes home around pounds 150 a week - about pounds 100 less than in the Army where his food and accommodation were subsidised.
His pounds 80,000 payment was mostly for the loss of the earnings he would have made if his five-year Army career had been allowed to run its 22-year course. He has tinnitus and can only drive lorries which are relatively quiet.
Last year the Court of Appeal ruled that "a serviceman owes no duty of care to his fellow serviceman in battle conditions", when a member of the Royal Artillery sought compensation after he was deafened when a howitzer was fired accidentally during the Gulf War.
But Mr Nicholl's solicitor, Paul Harrington, a former soldier who worked with Army bomb-disposal teams in Northern Ireland, said: "In peace-time, soldiers, sailors and airmen are entitled to health and safety legislation like any other workers."
Tom House, head of pensions at the Royal British Legion, said ex-servicemen who had suffered up to 20 per cent hearing loss were not eligible for disability pension. He advised them to go to court and sue the MoD. "This condition can ruin your social life and your family life," he said.
Mr Harrington, of Cambridge solicitors Lorimer, Longhurst and Lees, has several other similar claims coming to court.
Peter Corbin, a former Territorial Army captain with the Royal Green Jackets, was deafened during a two-week mock battle in Cyprus.
The exercise was the final stage in the Royal Military Academy, Sandhurst, officer training programme and the Green Jackets had been assigned to provide the opposition for the cadets.
Captain Corbin was sheltering in a disused farmhouse which came under attack. Contrary to Army rules, several thunderflashes - designed to simulate the sound of grenades - were thrown through the windows, exploding near his feet.
"It was awful," he said. "It was like sitting next to a bomb going off."
As the building was stormed, he jumped clear from a window and back into the battle being fought by about 800 troops with helicopters circling overhead. Two days later, after the exercise was over, the ringing in his ears remained and he could not hear what colleagues said to him.
He was discharged at his next medical and now has hearing aids fitted in both ears.
A graduate of London University, he found work with a graphic design consultancy, but the pain he suffers means he must avoid crowds and contact sports.
Mr Corbin, 28, said he had cried when told he was being discharged: "I was in my prime. Although I was on a short service voluntary commission from the TA, the regiment had asked me to stay on and I was ready to commit myself."
Grenadier Guardsman Carl Clarke, 26, had served at nine Trooping the Colour ceremonies before he perforated his eardrum in an accident with bomb-detecting equipment while on guard duty at Buckingham Palace. Soon afterwards he was sent on an exercise at Otterburn and a thunderflash was thrown at his feet, completely deafening him in one ear.
He is due to leave the Army next month, for a job at Felixstowe docks in Suffolk.