The General Court of the European Union said the contested measures were not based on an examination of Hamas's "acts examined and confirmed in decisions of competent authorities" but on imputations derived from the media and the Internet.
Prime Minister Benjamin Netanyahu swiftly called on Europe to maintain the ban. "We expect them to immediately put Hamas back on the list," he said in a statement from Jerusalem, denouncing Hamas as "a murderous terrorist organization".
The EU court did not consider the merits of whether Hamas should be classified as a terror group, but reviewed the original decision-making process. This, it said, did not include the considered opinion of competent authorities, but rather relied on press and Internet reports.
"The court stresses that those annulments, on fundamental procedural grounds, do not imply any substantive assessment of the question of the classification of Hamas as a terrorist group," the court said in a statement.
It therefore ruled that the asset freezes should stay in place for three months, pending further EU actions, in order to ensure that any possible future freezing of funds would be effective.
The court's decision followed an appeal filed by Hamas against its inclusion in the European Union's blacklist.
The EU is considering its next steps. It has two months to appeal.
The terrorist list designation bars EU officials from dealing with the group, and requires that any of the group's funds in EU countries be frozen.
Hamas official Izzat al-Rishq welcomed the decision. "This is the correction of an error and an injustice that was caused to Hamas, which is a national liberation movement."
Salah Bardawil, another Hamas official, called the decision a "strong, good shift" that he said would ultimately lead to European action against Israel.
"This decision corrects a great mistake committed against the Palestinian resistance that had Hamas connected to terror," he said.
The lawyer for Hamas, Liliane Glock, told AFP she was "satisfied with the decision."
Although Hamas presented the decision as a victory, Israel and the EU say that the change will not have an effect on the group's position as a terror group in Europe as the court will be given a few months to rebuild the file against Hamas with evidence that will enable the Gaza-based group to remain on the list of terror organizations.
Hamas's military wing was added to the European Union's first-ever terrorism blacklist drawn up in December 2001 in the wake of the September 11 attacks on the United States.
Hamas's political wing was added to the EU's list of terror organizations in 2003 after a diplomatic effort led by Israel and the US.
A few months ago, the Court of Justice made a decision to remove the Tamil Tigers, a Sri Lankan terror group, from the EU's terrorist list because of similar reasoning. The court concluded that the file did not have sufficient legal evidence proving the group was a terror organization. However, as is expected in the case of Hamas, the court gave the EU a window of time to re-submit its request and build a stronger legal file against the Sri Lankan group.
Hamas, aware of the case of the Sri Lankan group, saw an opportunity to remove itself from the EU's terror list which prevents all European nations from contacting the organization. Hamas appealed to the court on the same grounds as the Sri Lankan group.
According to reports from within Israel, some European countries, fearing the possiblity that Hamas would be taken of the EU's terror list, have already begun collecting intelligence information that could be useful in building a strong case against the group.
Israel, on its part, has a department dedicated to the issue within the Foreign Ministry and has already been collecting incriminating evidence against terror organizations such as Hamas and Hezbollah.
The weakness of the current case against Hamas, and against the Tamil Tigers, was said to be due to the nature of the European process for declaring entities as terror organizations. In the European system, the list must be reviewed every six months which resulted in the Europeans using unclassified material and media publications to rebuild the files, which were then automatically approved.
The Europeans feared presenting classified intelligence material to the court, with the apprehension that the information would ultimately end up in the hands of Hamas and aid the terror group. Therefore, the Europeans relied on low-level material to build the file against Hamas. The EU now realizes that it will have to introduce more solid evidence.
Another reason for the court to have accepted the appeal by Hamas to take themselves off the EU's terror list could be the court's attempt to strengthen its stance within the EU - not fearing confrontation with European countries.
Yitzhak Benhorin, Itamar Eichner, Roi Kais and Elior Levy contributed to this report.