A French appeals court in Nancy has barred subsidies received by Irish budget airline Ryanair from the Strasbourg Chamber of Commerce.
An official at the court said it had upheld a lower court decision that payments by the chamber to Ryanair was an improper use of public funds.
Ryanair says it will continue to appeal through the French and European courts.
It has consistently said that the agreement over its Strasbourg to London Stansted service was not state aid.
Air France complaint
Ryanair's chief executive Michael O'Leary said: "We have instructed our lawyers to appeal this decision which prevents the return of low fares air travel to Strasbourg."
He continued: "Ryanair is committed to restoring its low-fares
Strasbourg-London service, and will be appealing this decision, if necessary all the way through the French courts and to the European Court in Luxembourg itself."
Ryanair's shares fell by almost 5% immediately following the court decision.
In September, Ryanair suspended services to Strasbourg after a French court declared its deal with the local airport amounted to illegal state aid, following a complaint by Air France.
Ryanair argued that the payments were to cover its start-up costs on the route.
The Bas-Rhin Chamber of Commerce and Industry manages the airport in eastern France which had been used by Ryanair.
It had promised the Irish carrier 1.4m euros ($1.5m) to set up two daily roundtrip flights to London Stansted.
Air France protested that its Brit Air subsidiary had been forced to cancel its London-Strasbourg link because of the competition.
Ryanair said it was carrying 18,000 passengers a month through Strasbourg airport, whereas Air France had only 3,000 a month before the Ryanair route began.
Ryanair has opened a route to Baden-Baden, about 40 kilometres from Strasbourg, to try to keep its traffic in the region.
Meanwhile, the European Commission is poised to announce whether payments made by local authorities in Belgium to Ryanair, to open routes to Charleroi airport, breach competition rules.