Mr Raissi's compensation claim could run into millions of pounds
The government has been refused the right to appeal to the House of Lords over a damages claim by a pilot wrongly accused of training the 9/11 hijackers.
In February, the Court of Appeal said there were serious flaws in a decision to detain Algerian Lotfi Raissi in prison for nearly five months.
This ruling meant the government had to reconsider Mr Raissi's claim for compensation, which it had refused.
The pilot, from London, may be in line for a payout of millions of pounds.
Shortly after the 11 September attacks on New York and Washington in 2001, Mr Raissi was arrested under the Terrorism Act at his then home in Colnbrook, Berkshire, near Heathrow airport.
He was detained under an extradition warrant issued at the request of the US government, which accused him of having trained the 19 hijackers.
Demand for apology
Mr Raissi remained in Belmarsh Prison for four-and-a-half months until he was granted bail. The Crown Prosecution Service (CPS), which was representing the US, had objected to bail.
Court of Appeal judges found minor charges unconnected with terrorism were used to keep Mr Raissi in custody and their judgement was highly critical of the Metropolitan Police and the CPS.
On Wednesday, the House of Lords appeal committee said it had refused permission for an appeal because the petition did not raise an "arguable point of law of general public importance".
The cause had already been the subject of judicial decision and reviewed on appeal, it added.
In a statement, Mr Raissi called for a "long awaited apology" from justice secretary Jack Straw.
"The minister of justice has no more appeals and no more excuses," he said.
"The courts have held that I was the victim of a miscarriage of justice and that the police and CPS played a part in this."
His solicitor Jules Carey said the minister of justice would now have to reconsider Mr Raissi's application for compensation for the ordeal he had suffered.
"Given the clear opinions expressed by the Court of Appeal, we would expect the minister of justice to finally grant the application for compensation," he said.
A Ministry of Justice spokesman said: "The decision by the Court of Appeal is the end of the legal process.
"We are considering the implications of the Court of Appeal's judgment for Mr Raissi's application for compensation and will respond to him in due course."