The HS2 scheme has suffered a setback after it was ruled that the compensation process "was so unfair as to be unlawful".
The decision was a victory for the High Speed 2 Action Alliance (HS2AA), consisting of more than 70 affiliated action groups and residents' associations.
The HS2AA case on consultation was one of five separate cases brought to block the controversial scheme in its current form. It was the only case to succeed.
Mr Justice Ouseley, sitting at London's High Court, is now hearing submissions from lawyers on the appropriate remedy.
The first phase of HS2 would see a high-speed line running through Tory heartlands from London to Birmingham.
A second phase extends the line to Leeds and Manchester to create what will become known as "the Y network".
The project is designed to cut journey times, ease overcrowding and boost regional business.
The government hailed the court's decision on the cases it won as a "landmark victory" and said the loss on the compensation case would "not affect the HS2 construction timetable in any way".
Rail Minister Simon Burns said: "This is a major landmark victory for HS2 and the future of Britain.
The judge has categorically given the green light for the government to press ahead without delay in building a high-speed railway from London to Birmingham, Manchester and Leeds."
The then transport secretary Justine Greening gave HS2 the go-ahead in January 2012.
The judge said the £33 million scheme might in future be extended to Glasgow and Edinburgh, while the first phase would include a direct link with the existing high-speed Channel Tunnel rail link (HS1).
The judge stressed that it was not his task to review the merits of HS2 itself, but to consider whether the decisions setting it up were legally flawed.
He identified 10 grounds raised in the five cases brought by various opponents, including 18 local councils, scores of residents' associations and action groups, plus farmers and a golf club.
He rejected nine out of 10 of the grounds, which included attacks on the manner in which the project had been steered through Parliament and alleged breaches of EU environmental and habitat directives.
He also dismissed allegations that the government failed to take account of relevant issues and was guilty of indirect discrimination because of the impact of redevelopment of London's Euston station on the local ethnic minority community.
The 10th - and only successful - challenge was HS2AA's claim that the consultation and decision-making process on compensation was "fundamentally unfair".
Some 172,000 properties within 0.6 miles (1km) of the first phase are alleged to be affected by "HS2 blight".
David Wolfe QC, appearing for HS2AA, said tens of thousands of people who "just happen to live and own properties" along the high-speed route faced loss of value on their homes and being unable to move or remortgage for 15 years or more.
Mr Wolfe told the judge that 172,000 affected households had been contacted.
Householders faced inadequate compensation and the prospect of unfairly being made to suffer because of the claimed public interest in HS2 going ahead.
He said the consultation process was flawed because of "lack of detail" and insufficient information from Ms Greening on the options for a discretionary compensation scheme.
Allowing the HS2AA challenge, Mr Justice Ouseley ruled: "Although the overall decision is not irrational, the carefully reasoned and substantial HS2AA consultation response addressing the consultation issues as framed by the Secretary of State cannot have been conscientiously considered.
"All in all, the consultation on compensation was so unfair as to be unlawful."