The US Supreme Court has agreed to decide if the president can order the indefinite detention of US citizens in the administration's war on terror.
The government says Padilla is a threat to national security
Lawyers for Jose Padilla - who has been held without charge for nearly two years - say he has been denied his right to a fair trial.
Mr Padilla was arrested in Chicago in May 2002 on suspicion of planning to set off a "dirty bomb".
The court's ruling could set limits on US prosecution of its "war on terror".
The Supreme Court had already agreed to look into the case of Yaser Esam Hamdi, another US citizen held without charge after being seized in Afghanistan and declared an "enemy combatant".
By hearing both cases, the court could decide at the same time the rights of US citizens who have been captured abroad, like Mr Hamdi, and those seized at home, like Mr Padilla.
The top court has also said it will address another case related to Mr Bush's warn on terror and will decide whether foreigners captured abroad can go to US courts to challenge their incarceration at the military base in Guantanamo Bay, Cuba.
All of the cases surrounding the government's anti-terror policies are expected to be argued at the end of April, with rulings due by the end of June.
The BBC's Justin Webb in Washington say the Supreme Court's decision the cases has gone some way towards satisfying critics of the Bush administration.
Opponents want a comprehensive examination of the legal and constitutional rights of people caught up in the president's war on terrorism, our correspondent reports.
One of Mr Padilla's attorneys, Andrew Patel, said his client's rights had been ignored after he was accused of planning to detonate a "dirty bomb" - the name given to a device which spreads radioactive material using conventional explosives.
"Because the president said 'I think you're a bad man', he's been in jail for two years," Mr Patel said of Mr Padilla.
"He hasn't had a chance to defend himself. That's not the way we do things in this country, when we're at war or when we're at peace."
Attorney General John Ashcroft issued a statement saying that it was in the national interest to designate Mr Padilla as an "enemy combatant" as it had been determined that he was a grave danger to security.
He accused Mr Padilla of having close ties to Osama Bin Laden's al-Qaeda network, blamed for the 11 September 2001 attacks on the US and said he welcomed the Supreme Court's decision to judge the case.
"The president's authority to designate individuals as enemy combatants is a vital part of the war on terrorism. The court's action today provides an opportunity to reaffirm this critical authority," he said.