Opponents of the world's biggest new hydroelectric project - the Belo Monte dam in Brazil - notched up a rare victory this week, when a federal appeals court ordered construction to be suspended until indigenous groups are properly consulted about the project.

The judgment on Tuesday may prove only a temporary reprieve but it is seen as a scathing verdict on the government's efforts to rush forward with the Xingu River project in the Amazon, which - despite controversy - is one of the pillars of Brazil's efforts to reduce dependency on fossil fuels. It is also a setback for developers, led by Electrobras, which now face expensive delays or daily fines of up to R$500,000 (£166,00) if they do not comply with the court order.

About 12,000 construction workers are due to work on the dam this year, which is eventually expected to produce 11,000 megawatts of electricity - the third biggest hydro-electric generating capacity in the world after China's Three Gorges and Brazil's Itaipu dams. But the project has faced strong legal challenges and protests by conservationists and local tribes.

The project - initially conceived during the years of Brazil's dictatorship - was supposed to have gone through an extensive environmental impact assessment before the start of construction, but judges from Brazil's regional federal tribunal have accepted a lower court ruling that Congress acted illegally in authorising the dam without due consultation with the indigenous groups that might be affected.

"The court's decision highlights the urgent need for the Brazilian government and Congress to respect the federal constitution and international agreements on prior consultations with indigenous peoples regarding projects that put their livelihoods and territories at risk. Human rights and environmental protection cannot be subordinated to narrow business interests" said the author of the ruling, federal judge Souza Prudente.

Belo Monte will flood an area of 500 square kilometres along the Xingu and force the relocation of 16,000 people, according to the government. NGOs says the number of displaced may rise as high as 40,000. Opponents - including representatives of the Juruna, Arara and Xikrin tribes, as well as international conservation groups and celebrities such as Avatar director James Cameron and actress Sigourney Weaver - have welcomed the ruling.

"It's a historic decision for the country and for the native communities," Antonia Melo, coordinator of the Xingu Vivo indigenous movement, told reporters. "It's a great victory which shows that Belo Monte is not a done deal. We are very happy and satisfied."

But the battle is far from over. The Norte Energia consortium, which is building the dam, will have an opportunity to appeal, which they have done successfully in the past. Environmental and human rights groups are calling on the government to accept the judgement.

"This latest court ruling vindicates what indigenous people, human rights activists and the Federal Public Prosecutor's Office have been demanding all along. We hope that president Dilma's attorney general and the head judge of the federal court will not try to subvert this important decision, as they have done in similar situations in the past," said Brent Millikan of International Rivers.

Slowing the momentum of a $16bn project is bound to run up against many powerful interests and the Brazilian government - which has made the expansion of hydro-power one of it priorities - is unlikely to back away from this flagship dam.

But one of its main justifications - the production of non-fossil fuel energy to reduce the impact of global warming - may be undercut by other trends. In a new report, the National Institute for Space Research has revealed that carbon emissions from deforestation in the Brazilian Amazon fell by 57% between 2004 and 2011 as a result of improved measures to tackle illegal land clearances. If such gains could be built upon and more effort put into wind and solar energy, the pressure to harness Brazil's river might ease.