Haemophiliac Andrew March, 36, had sought a judicial review quashing the Health Secretary's May 2009 decision not to implement fully the recommendations of the Archer Report on supplies which were not adequately cleansed before use.
The Government has refused to assess compensation on the same basis as in the Republic of Ireland as it considers that the Irish blood transfusion service was found to be at fault, which was not the case in the UK.
At a hearing last month, Mr March's counsel, Michael Fordham QC, told Mr Justice Holman a judicial review was warranted as the decision was made for manifestly bad reasons.
"What we say is that the Secretary of State should reconsider this important aspect on a correct basis."
Supporters of legally aided Mr March, of Edith Road, West Kensington - who attended London's High Court for the ruling - applauded as the judge said he was satisfied that the Government's approach "has been, and remains, infected by an error".
Contesting the application, the Government argued that it had funded various schemes which had, at May last year, paid out a total of £142 million to those infected by NHS products.
Philippa Whipple QC said there was no misunderstanding, let alone error of fact, by the UK Government.
It accepted that the Irish scheme was not "fault-based" in a legal sense, but there were findings of fault which formed the context in which political decisions were made in Ireland in about 1997 to provide compensatory levels of award.
The judge said he wished to make absolutely clear that the allocation of resources was entirely a matter for the Government.
But it had been faced with a specific reasoned recommendation, which it had rejected, of comparability or equivalence with Ireland, where "very much higher" payments were made to sufferers and their dependants.
He said that, when pressed as to why they had rejected comparability, they had not merely repeated that they could not afford it but given a reason which, in his view, contained an error and did not withstand scrutiny - that they continued to regard the Irish system as based on fault rather than on compensation.
He added that he wished to make "very, very clear" that he had merely quashed the existing decision in relation to the relevant recommendation.
"I have given no steer or indication whatsoever as to what the Government may decide upon reconsideration, and it would be a grave abuse of my role if I were to do so.
"The campaign may now return to the political arena, but no-one should leave this courtroom with a false optimism."
The judge refused permission to appeal although leave can be sought directly from the Court of Appeal.
Outside court, Mr March said: "Having the judgment go in our favour gives us no pleasure at all.
"The judge's decision proves the flawed basis on which the Government made its decision not to implement the recommended compensation scheme.
"The judgment now compels the Government to retake the decision lawfully and based on accurate information.
"We hope that the Government will now consider the whole issue of compensating those so tragically affected by the contaminated blood disaster, instead of making token, derisory, ex-gratia payments."
Earlier, in his ruling, the judge had commended Mr March.
He said Mr Fordham had paid his client a warm tribute "for his tenacity and balance in the asking of questions and soliciting of information, and not taking no for an answer when the reasons are not good ones".
The judge added: "My impression is that that tribute is justified and well judged, and that the many other people interested in this cause owe gratitude to Mr March for his tenacity or persistence."
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