A Swedish court has upheld an arrest warrant against WikiLeaks founder Julian Assange for alleged sexual assault.

Wednesday's decision is a setback for 43-year-old Assange, who has been holed up at the Ecuadorian embassy in London for more than two years in a bid to avoid extradition to Sweden.

At the hearing in Stockholm District Court, prosecutors demanded that the warrant, issued in late 2010, should be upheld.

Assange's defence team, which had maintained that the investigation had taken an unreasonably long time, said it would appeal the decision, according to Swedish news agency TT.

As a result of the ruling, Assange will remain at the Ecuadorian embassy in London fearing extradition to the United States, said defence lawyer Per Samuelsson, quoted by TT.

The warrant was issued over allegations of rape and sexual molestation which Assange has denied.

The WikiLeaks founder sought refuge in Ecuador's embassy in Britain in June, 2012 after exhausting all legal options in British courts to avoid being extradited to Sweden.

He has said he fears that his being sent to Sweden would be a pretext for his transfer to the United States, where WikiLeaks sparked an uproar with its publication of thousands of secret documents.

WikiLeaks repeatedly drove the global news agenda with startling revelations of the behind-the-scenes activities of governments around the world, including confidential assessments by US diplomats of Chinese leaders and revised body counts in Iraq.

Assange's legal team had argued that Swedish prosecutors have dragged out the case for an unreasonably long period by not interviewing him at the embassy.

"By revoking the arrest warrant, the District Court must compel the Prosecutor's Office to move the investigation forward in the only way possible," Samuelsson told the court during the hearing.

"(It must) arrange a questioning of Assange in London and then move the investigation forward, so we can finally come to a conclusion."

Assange had acknowledged that even if the Swedish prosecutors had decided to drop the case, it would only be one part of the legal battle keeping him marooned at the embassy.

"I still have the larger problem, which is that of the United States and its pending prosecution, and perhaps extradition warrant," he told reporters in a conference call in June.