The ruling threatened recent Brussels attempts to play a bigger role in reviving the moribund Middle East peace process, with Israeli premier Benjamin Netanyahu saying it showed Europeans had learned nothing from the Holocaust.
A vote by the European Parliament backing the recognition in principle of a Palestinian state just hours after the Hamas decision, following a series of such votes in European nations, added fuel to the fire.
The EU insisted that it still viewed Hamas as a terrorist group, saying that the ruling by the General Court of the European Union was based on a technicality and that it might appeal the decision.
"This is a legal ruling, not a political decision," European Commission spokeswoman Maja Kocijancic said.
She said the EU would "take appropriate remedial action" and pointed out that under the ruling the designation of Hamas as a terror group and the freeze of its funds remains in place for three months or pending the outcome of an appeal.
She added: "The EU continues to consider Hamas a terrorist organisation."
Britain also said it wanted to maintain the terror listing.
Its embassy to the EU said the judgement "does not change UK or EU's position on Hamas, a terrorist group."
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. The EU blacklisted the political wing of Hamas in 2003.
EUROPE 'LEARNED NOTHING' FROM HOLOCAUST
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However the General Court of the European Union, its second highest court, ruled Wednesday that the listing was based on "factual imputations derived from the press and the Internet", instead of sound legal judgements.
It stressed that the decision was procedural, and did "not imply any substantive assessment of the question of the classification of Hamas as a terrorist group."
But Israel was in no mood for legal niceties.
"It seems that too many in Europe, on whose soil six million Jews were slaughtered, have learned nothing," Netanyahu said, demanding that the EU reinstate Hamas on the list.
"But we in Israel, we've learned. We'll continue to defend our people and our state against the forces of terror and tyranny and hypocrisy."
Hamas meanwhile hailed the decision as a "victory".
"This is a victory for the Palestinian question and for the rights of our people," Hamas spokesman Fawzi Barhum told AFP.
"We thank the European court for this positive decision which must be followed by international steps to lift the oppression of the Palestinian people."
The row comes as a blow to the EU's new diplomatic chief, former Italian foreign minister Federica Mogherini, who has focused on the Middle East peace process since taking office on November 1.
One of her first visits was a trip to Israel, Gaza and the West Bank during which she called for the establishment of a Palestinian state.
Meanwhile frustration has been growing in European capitals, with growing pressure on Israel to halt new settlements and get the peace process back on track.
In Spain, France, Britain, Ireland, Portugal and Luxembourg, national parliaments have backed motions calling on their governments to recognise Palestinian statehood, while Sweden's government has actually done so.