The test case ruling against the west London Borough of Hammersmith and three individual claimants is likely to cost London councils pounds 1m in money already paid out, but not reclaimable from the Department of Health, the Association of London Government said.
But Mr Justice Laws said the Government had correctly argued that the payments were not lawful under the 1948 National Assistance Act, which allowed councils to provide only food, shelter and the basics of life.
The ruling fuelled calls by Labour MPs and refugee groups for the Government to scrap rules introduced by the previous administration which deny social security to applicants who fail to claim refugee status at their port of entry. Clive Soley, the MP for Ealing, Acton and Shepherd's Bush and chairman of the Parliamentary Labour Party, said: "I and others will approach the present Government with a view to resolving this totally unsatisfactory situation."
Sheona York, a solicitor from Hammersmith Law Centre, which acted in the case, said she hoped the Court of Appeal would consider the case but emphasised: "The far more fundamental issue is whether the new Government is going to look comprehensively at the plight of asylum seekers."
She added: "The consequence of today's ruling is that single asylum seekers will continue to live in hostel bed and breakfast accommodation without money to use a telephone and no ability to have any social intercourse with the rest of the world."