The ruling opens up the way for American-style election battles over the views of individual candidates on single issues such as abortion, hunting and gay rights.
Campaign groups will be able to spend as much as they like on leafletting and broadcasting in the immediate period before an election in order to promote a favoured candidate or denigrate a rival.
Under The Representation of the Peoples Act 1983, a limit of pounds 5 is imposed on unauthorised electioneering.
But the European Court of Human Rights backed a case brought by Phyllis Bowman, the executive director of the Society for the Protection of the Unborn Child, who had been prosecuted for activities during the 1992 election.
Ms Bowman spent pounds 10,000 distributing 25,000 leaflets in the constituency of Halifax, West Yorkshire, citing Alice Mahon, the sitting Labour MP, as a leading pro-abortionist who had voted "to allow human embryos to be used as guinea-pigs".
Although the prosecution was dropped on a technicality, Ms Bowman took the case to Strasbourg, where judges ruled that her rights to freedom of expression had been infringed.
On hearing the news yesterday, Ms Mahon, still MP for Halifax, said: "I think it has really serious consequences for the democratic process. The person with the largest purse or wallet will be able to buy a candidate."
But John Wadham, director of Liberty, the civil rights group which opposes Ms Bowman's views on abortion, nevertheless welcomed the ruling. "The ability to participate in free political debate at election time is an essential ingredient of the democratic process," he said.
The decision will clear the way for anti-abortion campaigners to spend unlimited sums on posters and literature criticising electoral candidates who oppose their views.
"This could be very useful," said Jack Scarisbrick, the national chairman of LIFE. "Anything that opens up the way for the pro-life cause to be better communicated to the people, the better."
But Amanda Callaghan of the pro-choice Birth Control Trust, said that the anti-abortion campaigners would be wasting their money.
She pointed out that an expensive campaign at last year's election by the Pro-Life Alliance party had won only 19,000 votes in 56 constituencies.
"They have already spent the money and it made no difference," she said. Ms Callaghan added that if the changes in the rules did lead to a propaganda war, the pro-choice campaigners would respond in kind. "We have never shied away from a free and frank exchange of views on this subject," she said.
The Home Office, which is obliged to abide by Human Rights rulings, said it was "disappointed" by the finding, the Labour government's first defeat at Strasbourg.
Ms Bowman said she had taken her stand because election candidates avoided telling voters their views on key issues. In the past, the act has been used to prevent electioneering by anti-nuclear and anti-nazi groups.