The European Court of Justice annulled on Wednesday the European Union's decision to freeze the funds of a Saudi businessman on its terrorism blacklist, saying the bloc had failed to respect his rights of defence.

In a new blow to the EU's sanctions policy against those it suspects of supporting terrorism, the European Court of Justice said the bloc had failed to respect Saudi businessman Yassin Kadi's rights of defence.

For the same reason it also annulled the freezing of the funds of the Al Barakaat International Foundation, established in Sweden.

But the Court said the EU did not need to unfreeze the funds immediately, giving the bloc three months to put right its failure to respect the parties' rights of defence.

'The rights of the defence, in particular the right to be heard, and the right to effective judicial review of those rights, were patently not respected,' the EU's top court said in a statement.

But it added: 'It is conceivable that, on the merits of the case, the imposition of those measures on Mr Kadi and Al Barakaat may all the same prove to be justified.'

The European Union's two main courts have given several rulings in the past two years against the way the bloc puts groups and people on its terrorism list, notably the Iranian opposition group the People's Mujahideen Organisation of Iran.

But the bloc has not removed the people or groups from the blacklist, choosing instead to change its procedures and tell them why they were put on it.

A European Commission spokeswoman said the bloc would work on improving the procedure and use the three months to put right its failure to respect the parties' rights of defence.

'We have roughly three months to repair this,' the spokeswoman told a news conference.

Kadi was put on the EU blacklist after he was included on a UN list of individuals suspected of supporting Osama bin Laden directly after the September 11 attacks in 2001.

A lawyer for Kadi welcomed the court's ruling.

'It is a great day for justice when you have the world's biggest bloc's judiciary rejecting the Kafka type of policy of listing people ...without giving them the right to defend themselves,' said Saad Djebbar, coordinating council for Kadi.

Djebbar said Kadi wanted to be given a fair hearing by the EU - and by the United Nations. 'This is a financial Guantanamo,' he said of the practice of freezing the funds of blacklisted people without giving them a hearing. - Reuters