The group, the People's Mujahedeen of Iran (PMOI), hailed the verdict as a victory for justice and demanded that the EU strike it off the list of terrorist organisations and pay damages.
"The court annuls the funds-freezing decision insofar as it concerns the PMOI," the Luxembourg-based Court of First Instance said in a statement, just a day after the case was heard, the quickest judgement it has delivered.
The tribunal said the EU had "violated the rights of defence of the PMOI" by not providing the group with new information which the bloc said justified keeping it on Europe's list of terror organisations.
It said the EU had also refused to provide the information to the court based on a request from France, even though the details had already been given to the other 26 member countries.
"By refusing to communicate to the court certain information about the case, the (EU) has equally infringed the fundamental right of the PMOI to effective judicial protection," it said.
It was the third such ruling by the court, which is Europe's second-highest tribunal. The EU now has the choice of lifting the freeze, striking the group off its list or appealing against the decision.
"The council is examining the decision, and does not exclude an appeal," an EU official said.
He conceded the court had the jurisdiction to examine the freeze but said it had no power to rule on whether the PMOI could be placed under increased police surveillance, an element that also warrants inclusion on the list.
"The court has no competence over that aspect," he said.
Founded in 1965 with the aim of replacing first the Shah and then the clerical regime in Iran, the PMOI — now led by exiled Iran opposition figure Maryam Rajavi — has in the past operated an armed group inside Iran.
It was the armed wing of the France-based National Council of Resistance of Iran (NCRI) but it renounced violence in June 2001.
In a telephone call with AFP, Rajavi said: "This is a victory for justice."
"With this verdict, PMOI is no longer on Europe's terrorist list and cannot be put on it in the future," she said, adding that the EU "must officially and publicly present an apology".
She also demanded that the bloc pay court costs and damages.
The EU first decided to put the group on its list of people and entities whose assets should be frozen in May 2002, citing the move as part of its efforts to combat "terrorism".
The move was based on EU measures implemented to respect a UN Security Council resolution drawn up in the wake of the September 11, 2001 attacks in the United States, which required countries to crack down on terror funding.
This decision was annulled by the court in December 2006, but owing to the fact that the terror list is updated roughly every six months, the PMOI was struck off a list from 2002, but remained on those that followed.
Then in July, the European Council of EU member states placed the Iranian opposition group on its latest terror list citing "new information" on the group, which has not been made public.
But in a second ruling in October, the Court of First Instance ruled that the EU had "failed to give sufficient reasons" to keep the group on the list after a British court decision to remove them from its national list.
This third verdict increases the pressure on the European Union to heed the court and keep the PMOI name off any future list — and a fresh review is currently underway.
The EU official said "the updating of the new list will be postponed (by the ruling) but in any case should be done by the end of the year."
