On Monday a federal appeals court ruled that Caterpillar Inc, the Illinois-based company that has supplied several bulldozers used by the Israeli Defence Force (IDF) in house demolitions in the occupied territories, could not be sued as to do so would bring the judiciary into conflict with the executive branch of the US government.

A panel of three judges argued that the legal action could not have gone to trial "without implicitly questioning, and even condemning, United States foreign policy towards Israel".

Corrie was killed on March 16 2003 by a 60-tonne Caterpillar D9 bulldozer in Rafah, Gaza, as she was attempting to prevent the home of a Palestinian pharmacist being razed. She was wearing a fluorescent orange vest and according to witnesses in full view of the bulldozer operator.

Her parents, along with four Palestinian families left bereaved in actions involving similar bulldozers, began legal proceedings in 2005. Lawyers acting for the families alleged that Caterpillar had sold the machines to the Israeli government on a commercial basis. The firm knew, or should have known, that the equipment was going to be used to demolish homes in violation of international law in incidents that at times led to the deaths of innocent people, they said.

Caterpillar, with supporting evidence from the US government, argued that the machines had been paid for by the Pentagon as part of the government's military aid to Israel.

Cindy Corrie, Rachel's mother, told the Guardian that she was extremely disappointed by the court's decision. "Clearly there were war crimes committed here and we will continue to challenge Caterpillar and the US government."

Mariah LaHood, a lawyer with the Centre for Constitutional Rights who acted on the case, questioned the role the US government played in giving evidence favourable to Caterpillar. "Isn't there a responsibility to permit justice to be sought on behalf of a US citizen killed in a foreign country?"

Caterpillar said in a statement that it was pleased with the ruling. "We are hopeful it will bring to an end what has been a lengthy but fair judicial process."

Corrie's story received widespread attention at the time of her death. Her emails home describing her experiences as a peace activist in the run-up to her death were turned into a stage play, My Name is Rachel Corrie, coedited by Alan Rickman and the Guardian journalist Katharine Viner.

Among the other families included in the legal suit were that of Mahmoud Omar al-Shu'bi from Nablus in the West Bank. In April 2002 a D9 bulldozer destroyed his home in the middle of the night in an action by the IDF, allegedly without warning. His father Umar, sisters Fatima and Abir, brother Samir and sister-in-law Nabila who was pregnant, as well as their three children aged four , seven and nine, were all killed.

The sale of Caterpillar equipment to Israel caused controversy within the Church of England after the synod voted last year to disinvest from firms profiting from Israel's occupation of Palestinian territory. However, it later decided to keep its shares in the company.