Judges in Luxembourg said the Net Book Agreement, operating between Britain and the Irish Republic, by which books must be sold at publishers' prices, was illegal.
A leading bookseller said the decision would lead to lower prices but the Publishers' Association, which represents up to 80 per cent of Britain's publishers, insisted the ruling did not apply to trade within the United Kingdom.
The full implications of the ruling have to be clarified, but whatever the outcome, booksellers will be able to avoid the NBA, which controls the price of three quarters of the books sold in Britain.
Even if the ruling does not apply to sales in the United Kingdom, booksellers will be able to get around the NBA by setting up an office in Ireland, importing books from Britain and then sending them back to their shops in the UK to sell at below the fixed price. This practice is called 'parallel trading'.
The Pentos group, which owns the bookshop chain Dillons and has been the main opponent to the NBA, will challenge a court injunction taken out by the publishers in October which had prevented it from selling books at lower prices.
Terry Maher, chairman of Pentos, said: 'This ruling means the agreement is fatally flawed and is no longer legally valid.'
He said once the injunction had been removed, Pentos would reduce some books by up to 30 per cent. It would also run special promotions with banks that would include discounts - advertising methods that are banned at the moment.
Conditions set out in the NBA apply to all sales of books to the public in the UK or the republic by any wholesaler or retailer wishing to distribute a book at net retail price.
The deal is rigorously enforced but in 1988 the EC declared the arrangement illegal under rules on free competition.
The European Court yesterday said the commission was correct in its assessment that the NBA and its governing rules had an 'appreciable' effect on trade between member states, contrary to the Treaty of Rome.
The Publishers' Association, which brought the case to the European Court, was ordered to pay costs. It can now appeal to the European Court of Justice.
The association said the original commission order applied only to intra-community trade and not to the domestic operation of the NBA in the United Kingdom.
Peter Phelan, a consultant for the association, said it would take legal action if Pentos used parallel trading.
Tim Godfrey, director of the Booksellers' Association, said Pentos was the only major bookseller that did not welcome the NBA. He said most major sellers believed it was 'extremely beneficial' and it was also supported by many publishers, libraries and readers.
The judgment's immediate effects are likely to be limited, although booksellers in the Irish Republic will now be able to sell UK net books below the UK net price.
However, exports to the republic represent only 1.2 per cent of Britain's book production.
Gemma Barry, chairwoman of the Irish branch of the UK and Irish Booksellers' Association, said she was disappointed with the ruling and bookshops were unlikely to cut net book prices in the immediate future.