Government plans to abolish the Independent Living Fund (ILF) have been declared legally flawed and blocked by the Court of Appeal.
Three senior judges ruled there was "simply not the evidence" to show that the Department for Work and Pensions (DWP) considered properly "the potentially very grave impact" of closure on severely disabled people who rely on the fund.
The ILF currently provides support enabling nearly 20,000 vulnerable recipients to live independent lives in the community.
Lord Justice Elias, Lord Justice Kitchin and Lord Justice McCombe unanimously agreed to quash the December 18 2012 decision to shut down the fund.
Lord Justice McCombe said the evidence upon which the closure decision was based did not give "an adequate flavour of the responses received indicating that independent living might well be put seriously in peril for a large number of people".
The judges ruled there had been a failure by the Government to comply with its public sector equality duty (PSED) to properly assess the effects of closure, as required under the Equality Act 2010.
Lord Justice Elias said: "Any government, particularly in a time of austerity, is obliged to take invidious decisions which may exceptionally bear harshly on some of the most disadvantaged in society.
"The PSED does not curb government's powers to take such decisions, but it does require government to confront the anticipated consequences in a conscientious and deliberate way insofar as they impact upon the equality objectives (of the Equality Act)."
The current minister for disabled people, Mike Penning, said the DWP was "disappointed with certain aspects of today's decision" and was now considering "the appropriate way forward" and whether to appeal.
But he said he welcomed the court's finding that, although there had been a failure to provide sufficient documentary evidence, the consultation exercise that led to the ILF closure decision was carried out properly and fairly.
The ruling was a victory for five fund users, including Gabriel Pepper, from Walthamstow, east London. He accused the Government of imposing "appalling cuts" which were "a vicious attack on the disabled".
The other applicants were Stuart Bracking, Paris L'amour, Anne Pridmore and John Aspinall, who brought his case with his mother, Evonne Taylforth, acting as his litigation friend.
The five are among fund-users who currently receive money from the £359 million ILF. The average payout is £300 a week per recipient.
The money enables them to employ personal assistants to help them with their personal needs and, they say, to "go out and have a full life".
The five successfully appealed against a High Court ruling by Mr Justice Blake in April that the closure decision was lawful.
Their solicitors - from law firms Deighton Pierce-Glynn and Scott-Moncrieff & Associates - said the appeal judges had given a "powerful" ruling " of major importance not just for the claimants, but for all disabled people".
They said many of their clients feared that loss of ILF support would "threaten their right to live with dignity" and force them into residential care - or that they would "lose their ability to work and participate in everyday activities on an equal footing with other people".
Jenny Hurst, 41, a service user from Greenwich, south east London, who waited in the rain in her wheelchair outside the Royal Courts of Justice, said after being told the outcome of the appeal: "I am absolutely delighted.
"I was sick with worry waiting for the result and now it is a huge relief to have got over this first hurdle. There is more to go but we have got over this first hurdle, which is fantastic."
David Wolfe QC, appearing for the five, argued that documents presented to the then minister for disabled people, Esther McVey, with very few exceptions, did not give a true flavour of the impact of closure of the fund on the ability of users to live independent lives and "represented a failure by officials to inform the minister of the true level of the threat".
Lord Justice McCombe agreed and said: "In the end, drawing together the principles and the rival arguments, it seems to me that the 2010 Act imposes a heavy burden upon public authorities in discharging the PSED and in ensuring there is evidence available, if necessary, to demonstrate that discharge.
"It seems to have been the intention of Parliament that these considerations of equality of opportunity - where they arise - are now to be placed at the centre of formulation of policy by all public authorities, side by side with all other pressing circumstances of whatever magnitude."
The Equality and Human Rights Commission (EHRC), which took part in the case, welcomed the appeal court ruling, saying: " This means that, until or unless the Government revisits the decision, more than 19,000 of the most severely disabled people in this country will continue to receive the support they are currently entitled to.
The closure of the fund would have meant disabled people becoming entirely dependent on local authority services.
Richard Kramer, deputy chief executive at national deafblind charity Sense, said: "Today's decision by the Court of Appeal is not only welcome news for disabled people but also a long overdue wake-up call for Government.
"The current social care system is chronically underfunded and the Independent Living Fund plays a vital role in helping some of the most vulnerable members of society to play a part in the community.
"The plan to close the Living Fund would put extra pressure on disabled people who then face re-assessment for this vital support."