The only man charged in the US over the 11 September attacks has been barred from calling as witnesses people held at the US Guantanamo Bay prison camp.
Mr Moussaoui denies involvement in the 9/11 plot
However the ruling by federal judges allows the accused - Frenchman Zacarias Moussaoui - to use written evidence from some of the al-Qaeda suspects.
The court also allowed prosecutors to seek the death penalty.
Mr Moussaoui admits being a member of al-Qaeda but denies involvement in the plot to hijack planes and crash them.
His lawyers say testimony from al-Qaeda detainees at Guantanamo will show Mr Moussaoui's only role was in a planned follow-up operation.
US Attorney-General John Ashcroft said the ruling showed the government could provide a fair trial, while protecting national security.
Mr Moussaoui - who is of Moroccan origin - was indicted two years ago on four counts of conspiracy to commit terrorism.
The 35-year-old defendant had been under arrest on immigration charges when hijackers crashed civilian airliners into the World Trade Center and other targets, killing more than 2,800 people.
The US government says he was a full member of the original hijack team.
In preparing his case, Mr Moussaoui has been seeking to interview three major al-Qaeda suspects being held by the US - but prosecutors had objected, citing security concerns.
The three judges on the Court of Appeal in Virginia also overruled a lower court decision by deciding that the death penalty could be used if there was a guilty verdict.
Mr Moussaoui's trial is unlikely to begin before the middle of next year.