Downing Street reacted with incredulity and anger, dismissing the judgment as "defying common sense".
By the narrowest of margins, a vote of 10-9, the court ruled that the killing of Daniel McCann, Sean Savage and Mairead Farrell, was unnecessary, that they could and should have been arrested, and that international conventions had been breached by the use of excessive force. However, it cleared the Government, the SAS soldiers and the security services of operating a shoot-to-kill policy.
The judges refused to compel the Government to order compensation to the families of the three, as it would normally do, because they were terrorists engaged on a bombing mission. However, they ordered the Government to pay the families' pounds 38,700 legal costs.
Last night a question mark hung over whether the Government would agree to pay up - even though it appeared determined to ignore other implications of the ruling - and to do so risks the humiliation of being expelled by the other treaty signatories. Although govern- ments can dismiss, or "derogate" from, European Court security rulings, they are forbidden to do so when Article 2 - the right to life - is breached.
Senior Government sources confirmed that John Major and key ministers will review Britain's support for the European Convention on Human Rights. Michael Heseltine, the Deputy Prime Minister, refused to rule out withdrawing from the convention but said the Government did not want to "whet appetites or slam doors in the immediate anger that flows from decisions of this sort". He added: "There are a whole range of complex legal and wider political issues which governments rightly consider collectively."
As a founder signatory Britain is unlikely to withdraw, as it wants to use the convention to curb human rights abuses in the independent states emerging from the former Soviet Union. That would be undermined if Britain pulled out.
Mr Heseltine, referring to the court ruling, said: "We shall do nothing. We will pursue our right to fight terrorism to protect innocent people where we have jurisdiction, and we will not be swayed or deterred in any way by the ludicrous decisions of the Court."
While ministers hoped the ruling would not have any lasting impact on the Irish peace process, it provoked a furious clash between Mr Heseltine, and Jack Straw, Labour's home affairs spokesman.
Mr Straw insisted that it was "incumbent" on the Government, as a signatory to the convention, to accept the ruling of the court. Mr Heseltine accused him of supporting a verdict which sent a "triumphant signal" to terrorists. However, Mr Straw immediately threatened legal action for "a disgraceful slur".
An estimated 35 out of 76 judgments by the European Court of Human Rights have gone against the Government, largely because the convention is not incorporated into British law, and complainants therefore have to turn to Strasbourg for alleged breaches.
Yesterday's ruling - an unusual reversal of an earlier decision of the European Commission - was regarded as a landmark in international law, as it was the first time the Court has ruled on the use of lethal force and the right to life.
The IRA trio were brought down in a hail of bullets as they headed towards the Spanish border on what turned out to be a reconnaissance trip.
The Government, the security services and the SAS men who killed them have always maintained that they believed the terrorists were about to explode a bomb. In the event, the three were unarmed and no bomb was found on the Rock, although explosives were later discovered in Spain.
The killings immediately re-opened claims that the Government operated a shoot-to-kill policy.
The families of the dead were delighted by yesterday's decision, proclaiming it as a vindication of their long campaign. One said it proved the British government were "a bunch of murderers". Relatives said they would press for a full independent judicial inquiry.
Sinn Fein's president Gerry Adams claimed that nearly 400 people had died at the hands of British forces in "Britain's long dirty war in Ireland".
David Trimble, leader of the Ulster Unionists, said the decision would strike dismay into all police forces in Europe and could seriously hamper peace-keeping activities and the maintenance of law and order.
Relatives' joy at verdict; David McKittrick page 2
The long quest for
answers page 3
News Analysis: How the court works page 19
Leading Article page 20
Andrew Marr page 21