The government has lost another case in the War on Terror, with the D.C. Court of Appeals on Friday ruling in favor of a man with U.S.-Jordanian citizenship who has been held in Iraq for over two years on suspicion of terror activities.

Shawqi Omar has been held by multinational forces in Iraq on suspicion of planning kidnappings and terror operations in and around Baghdad. The U.S.-led forces had sought to turn Omar over to an Iraqi criminal court that specializes in terrorism prosecutions, but his wife and son stepped in and initiated habeas action in the United States. The government argued that U.S. courts had no jurisdiction over events unfolding halfway around the world, nor did they have jurisdiction over the operations of international forces. The government cited two WWII-era court cases to strengthen its argument.

But on Friday, the D.C. Court of Appeals strongly disagreed.

In a 37-page ruling, the appeals court said, in effect, that the two cases cited by the government did not apply to Omar because the defendants in those cases were citizens of foreign countries and had been convicted of prior crimes. Omar is a U.S. citizen who just stands accused of plotting acts of terror.

U.S. federal courts, the ruling adds, do have jurisdiction in his case because many of the respondents — the secretary of the Army, for example — "are amenable to service in the District of Columbia."

"Second, although American personnel in Iraq operate as part of the MNF-I [multinational forces] the government concedes that Omar is held by U.S. forces," the ruling continues. "...Omar is thus in custody under or by color of the authority of the United States. As a consequence, the district court has jurisdiction to entertain Omar's habeas petition."

In addition, the appeals court says, the Supreme Court's ruling in the Yaser Esam Hamdi case opens the way for Omar to challenge his own detention, while it also sees Omar's argument that it would be illegal for the United States to transfer him to Iraqi custody as valid.

That case, ruled on by the Supreme Court in June 2004, said both U.S. citizens and foreign nationals seized as potential terrorists can challenge their treatment in U.S. courts.

The U.S. Justice Department said it was "disappointed" by the court's 2-1 decision.

"Although we are still evaluating the opinion, as Judge [Janice Rogers] Brown noted in her dissent, 'it would be dangerous folly to deny what this case involves: The capture of an alleged enemy combatant by American military personnel operating in a war zone,'" the agency said in a statement.

"The ruling will 'substantially interfere' with the executive branch's prerogative to prosecute a war and to make good on its commitments to our foreign allies," Justice continued, quoting from Brown's dissent. "The court's decision is 'unprecedented' and has the 'remarkable effect of enabling a court sitting in Washington, D.C., to block the efforts of a foreign sovereign to make an arrest on its own soil.'

Omar was captured in Baghdad by multinational forces during a raid on a terrorist safe house in Iraq. He is a relative by marriage of former Al Qaeda in Iraq leader Abu Musab al Zarqawi who was killed by U.S. forces last year. The U.S. government argued Omar was in the middle of hatching a plot to kidnap foreigners from hotels in Baghdad.

FOX News last year learned that Omar's brother and nephew are facing money laundering and bank fraud and loan fraud charges in Utah. Federal investigators working in Utah believe the two men funneled money to banks in Jordan, and that money may have found its way into the hands of terrorists in Iraq.

Iraqi courts were then reporting to have been weighing charges against him, and the United States was ready to turn him over until the middle of February 2005, when a U.S. district judge barred the transfer pending a court decision on whether Omar should have his case heard in a U.S. court. Relatives of Omar's in the United States had filed a habeas petition, demanding that he be charged with something and tried in the U.S.

Omar was also wanted in Jordan in connection with an aborted chemical attack that Zarqawi and his group were planning on that country's intelligence headquarters in Amman in 2004.