The verdict, which the government has said it would appeal, means the UK's decision to leave the EU must go to a parliamentary vote and cannot be decided by ministers alone.
While "Bremainers" will cheer the verdict, experts see the landmark ruling as slowing down the process of Brexit rather than putting a halt to it.
British PM Theresa May has been severely criticized for trying to bypass parliament and for keeping her cards close to her chest on her negotiation strategy. Thursday's verdict should force her to reveal more to parliament about her planned Brexit strategy.
The legal dispute centred around the famous Article 50 of the treaty of the European Union, which must be triggered for Britain to begin the official and painstaking process of divorce from the EU.
The government believed it had the right to officially inform Brussels it is leaving the EU via its royal prerogative – powers that technically belong to the Queen, but which are vested in the government. But lawyers for the claimants, two British citizens, and other interested parties argued that parliament must have the right to decide.
In reading out the verdict the lord chief justice Lord Thomas of Cwmgiedd ruled that “the most fundamental rule of the UK constitution is that parliament is sovereign.
He added: "The court does not accept the argument put forward by the government."
The shock verdict came after the lord chief justice spent three weeks considering the case with two other senior judges.
Their decision was read out to a packed courtroom in London's Royal Courts of Justice.
The government said it would appeal the decision with a hearing in the Supreme Court due to take place in early December.
Government says it is "disappointed" by court ruling on Article 50 and will appeal, expecting Supreme Court hearing on December 7- Jessica Elgot (@jessicaelgot) November 3, 2016
It was suggested before the verdict that the government may also decide not to appeal and instead gamble on the fact it has enough support in parliament to risk a vote by MPs, who, even if they are against Brexit, feel the referendum vote must be honoured.
However the House of Lords may be trickier.
Theresa May said last month that the government would trigger Article 50 to begin formal exit negotiations by the end of March 2017, however Thursday's decision may scupper that plan.
No date for the momentous parliamentary vote will be set until the legal process has been played out.
Once Article 50 is triggered than that begins a two year process of negotiations between the UK and the EU, although many experts believe talks will rumble on for much longer.
The verdict did however have an immediate impact on the level of the Britain's currency as the pound sterling shot up.