The Court of Appeal threw out a challenge Friday to the government's so-called "bedroom tax", rejecting the claim that it discriminates against people with disabilities in a key test case on state benefits.
Lord Dyson, Master of the Rolls, said the legal challenges, made by five disabled housing tenants, were against two "of the government's most controversial measures" in its recent programme of welfare reforms.
But he said the criteria for intervention, that the tax was "manifestly without reasonable foundation", had not been met.
The reforms, introduced last April, have led to reductions in housing benefit payment to tenants in social housing deemed to be under occupying their accommodation, according to certain "size criteria".
Lawyers for the tenants argued that the tax violates human rights laws and breaches common law because of its impact on vulnerable families.
Two of the five were lone parents who said they were forced into temporary accommodation in London as a result of the changes.
The group immediately vowed to continue their legal battle following the ruling and said they were considering the possibility of an appeal to the Supreme Court.
Ugo Hayter from law firm Leigh Day, representing two of the appellants, said they were "baffled" by the judgement.
"The court recognised that our clients and thousands of disabled people across the UK had a need for accommodation not provided for by the new housing benefit rules, however the court decided that disabled tenants should not have their housing needs met on an equivalent basis to their able-bodied counterparts, just because they are disabled," he said.
Anne McMurdie of Public Law Solicitors, acting for three of the appellants, accused the government of targeting the most vulnerable to make savings.
"On the government's own figures at least 440,000 disabled households will lose out under the new regulations," she said.
"There is compelling and growing evidence of the terrible adverse impact on disabled tenants, having to make the dreadful choice between paying the rent and buying food or heating their homes."
The Department for Work and Pensions (DWP) welcomed the court's ruling, stressing that judges had found the law compliant with the European Convention on Human Rights.
"We are pleased that the courts have once again found in our favour and agreed our policy is lawful," a DWP spokesman said.
"Reform of housing benefit in the social sector is essential to ensure the long-term sustainability of the benefit. But we have ensured extra discretionary housing support is available for vulnerable people."