The European court today threw out a legal bid by airlines to overturn passenger compensation rules introduced last year.

The International Air Transport Association (IATA) and the European Low-fares Airline Association (ELFAA) argued that the rules offering compensation for cancellations, delays and overbooking by airlines were "discriminatory" and in breach of the Montreal Convention.

Low-cost carriers, such as easyJet, claimed the legislation was unfair and too expensive, saying that in some cases the level of compensation awarded would exceed the original ticket price.

But the European court of justice said the arrangements were in line with EU rules and should remain in place.

Under the rules, which apply to scheduled and chartered flights, including package holiday flights, passengers turned away from an overbooked flight receive compensation of €125 (£85) for short-haul flights, rising to €600 (£410) for long-haul flights.

Those who experience extensive delays get all of their money back, as well as free hotel accommodation.

IATA, which represents 95% of the world's largest airlines, said its members already offered compensation when flights were overbooked - sometimes with better terms than under the EU rules.

The association claimed the EU rules breached the Montreal Convention, stating that airlines could not be held responsible for circumstances beyond their control.

And it argued that because the legislation only applied to airlines and not other forms of transport, it amounted to discrimination.

Today the Luxembourg judges, who were sent the case by Britain's high court, rejected both arguments.

ELFAA - whose members include Ryanair, Hapag-Lloyd Express and flybe - had challenged the passenger compensation legislation on the basis that it was "discriminatory and limits consumer choice".

The association said the rules had created huge confusion among consumers who did not understand the limits.

It added: "We strongly feel the legislation does nothing to ameliorate delays and cancellations in air transport, with the vast majority of incidents being beyond the control of airlines."

And low-fare airline easyJet said it was "disappointed but not surprised by this ruling".

"We are calling for an immediate review of this compensation law.

"We think it is one of the worst pieces of legislation ever produced by Brussels because it makes airlines responsible for paying compensation for events wholly out of their control."

The Air Transport Users' Council (AUC), the consumer council for air travellers, said it hoped the ruling would now force all airlines into line on the issue of compensation.

"The regulations have been in place for a year and generally, the experience has been good, so we're pleased this complaint has not been upheld," said James Fremantle, industry affairs manager for the AUC.

Mr Fremantle said some airlines had issued notices to the effect that they would not comply with the regulations, which were under review.

"Hopefully now this ruling will make all airlines fall into line," he added.

At the time of their introduction in February 2005, the rules were hailed as good news for air travellers but they have since been plagued with problems.

Critics say the wording of the legislation allows airlines to renege on the deal, routinely pinning a cancellation on something that allows them to escape their obligation to pay out.

And in August, the AUC said the number of complaints it had received had increased fourfold and that it was struggling to cope with the backlog.

The legislation also sparked concern that the increased costs to airlines would force a rise in prices.

IATA estimates the regulation will cost the industry more than £410m a year at a time when it is facing higher fuel charges and increased competition.